Restrictions on Cryptocurrencies in Japan

Being among the most progressive Cryptocurrency regulatory regimes, Japan’s Payments Services Act (PSA) treats Bitcoin and other virtual assets as legal tender. As a consequence of this law, Crypto exchanges in Japan must register and adhere to the same AML or CFT obligations as any other financial institution. In December 2017, the National Tax Agency (NTA) ruled that Cryptocurrency profits must be treated as “miscellaneous income,” as well as buyers must be reimbursed as such.

What is Crypto Asset?

The term “Crypto Asset” is not recognized as a “Security” under Japanese law, as that term is defined by the FIEA. A “Crypto Asset” is defined in the PSA, and anybody offering CAES in Japan must be registered with the country’s Financial Services Administration. Anybody engaging in CAES without first registering as a CAES provider is against the law and may expect to face consequences. As a result, it is vital to understand the differences between Crypto Asset as well as CAES. The PSA defines a “Crypto Asset” as an item of value that may be transmitted electronically and used to make payments to an unidentified third party, or that can be exchanged with an unnamed third party for another item of value that meets the criteria in the first bullet point.

Cryptocurrency Exchange Regulations

The rules governing Cryptocurrency exchanges in Japan are still in the works. In keeping with Japan’s progressive stance, the PSA only allows organizations with a highly qualified Financial Bureau to operate as Cryptocurrency exchanges, however exchanges based outside of Japan are allowed to operate provided they can demonstrate an equal registration criteria in their host country. Although exchanges are legal in Japan, the country has made enforcing Crypto rules a top priority after a string of strong-profile hacks, most notably the Coin check heist, which stole $530 million worth of digital currency. The Japanese Financial Services Agency (FSA) has ramped up its enforcement of its trading as well as exchange regulations. Since the PSA was updated, Cryptocurrency exchanges must now register with the FSA before they can begin trading, a process that may take up to 6 months and which imposes stronger cybersecurity as well as anti-money-laundering or counter-financing-of-terrorism criteria.

Changes in Cryptocurrency Rules in Japan

The FATF revised its recommendations in October of this year. The regulations would require Crypto asset exchanges, custodians, and others to provide safeguards against money laundering and the financing of terrorism. The Payment Service Act was updated on May 1, 2020, to include such FATF recommendations. The most important aspects of the revised Payment Service Act are as follows.

The Bottomline

In spite of the fact that the proposed amendments to the Payment Service Act have nothing to do with taxes, it is hoped that new regulations governing the taxation of Cryptocurrencies will be established. At present, for instance, individuals’ gains from the sale of Crypto assets are taxed at regular individual tax rates; adopting more advantageous rates may promote Japan as a “hub” for digital assets in Asia and so stimulate future development in the industry.
Disclaimer: The author’s thoughts and comments are solely for educational reasons and informative purposes only. They do not represent financial, investment, or other advice.

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