Japan is preparing for a major reset of its cryptocurrency regulations. The Financial Services Agency (FSA) is considering amending the law to reclassify virtual currencies from payment tools to “financial products” in order to strengthen investor protection as the number of virtual currency accounts increases fourfold in five years.
On November 26, the Financial Services Agency Working Group on Virtual Currency Regulation held its sixth meeting to discuss persistent consumer complaints, an increase in overseas fraud schemes, and the growing threat of increasingly sophisticated cyberattacks. According to the discussion, there are an average of approximately 350 crypto-related consumer complaints each month.
The transition from the Payment Services Act (PSA) to the Financial Instruments and Exchange Act (FIEA) could lead to stricter disclosure rules, insider trading protections, and criminal penalties for crypto businesses.
virtual currency tax reduction
The working group also proposes introducing a flat 20% tax on crypto profits, bringing it to the same level as stock trading. Currently, profits from crypto assets are treated as miscellaneous income and are subject to taxes ranging from 15% to 55% depending on the taxpayer’s income bracket.
Tatsuo Oku of the Blockchain Promotion Association (BCCC) said that the number of cryptocurrency accounts has increased to 13 million in Japan, and he expects demand to grow further if the tax system is aligned with financial products.
Rintaro Kawai, CEO of ANAP Holdings, which operates a Bitcoin trading desk in Japan, warned that Japan is “far behind” the rest of the world in adopting Bitcoin, and said that without bold tax reform, the country “has no future.”
Cryptographic identity crisis
Yoshikazu Yamaoki, a professor at Shinshu University’s Faculty of Economics and Law, said the overhaul reflects the growing recognition that the virtual currency market is increasingly becoming a securities ecosystem rather than a payments niche.
“The prices of cryptoassets like Ethereum and Bitcoin are too volatile, so they don’t really work as a means of payment either,” he explained. “People who buy these are looking for capital gains. Basically, they’re buying low and selling high. And when you’re looking for capital gains, it’s essentially the same as a security.”
BCCC’s Oku said that while the transition to a FIEA regime would strengthen market confidence through stricter disclosures, it would impose tougher compliance burdens at the security level and could encourage mergers among weaker exchanges.
Regulators are also considering models that would classify tokens based on whether they have an identifiable issuer, such as a company or foundation.
Kawai believes that the main problem with Japan’s reclassification debate is the inability to distinguish Bitcoin from all other tokens. Globally, Bitcoin is treated separately as it has no issuer and behaves like a decentralized asset class, whereas tokens such as Ethereum and XRP have identifiable development entities.
“If Japan does not adopt this distinction, the regulatory framework will tilt toward traditional financial institutions, banks, and securities companies that can absorb more stringent compliance demands, rather than supporting the broader cryptocurrency ecosystem,” he said.
Japan’s patchwork legal approach
The PSA has undergone four major revisions since it came into force in 2010. The first revision in 2016 created a legal category for virtual currencies in response to the rise of Bitcoin, but a complete review in 2019 changed the name of virtual currencies to “cryptoassets” and made the provision of investment-type tokens subject to securities regulations.
Subsequent amendments in 2020 reorganized funds transfer services and strengthened user protection, while amendments in 2022 established one of the world’s first regulatory frameworks for stablecoins and introduced the concept of “electronic payment instruments.”
Japan cannot keep up with virtual currency
All FSA working groups agree that the rapid growth of the virtual currency market has outpaced existing safeguards and it is no longer possible to prevent fraud or ensure the integrity of the market.
Yamaoki said the rules governing cryptocurrencies have become too fragmented and are undergoing a “patchwork” of fixes since the collapse of Japan-based Mt.Gox in 2014.
He said white papers, documents that outline how tokens work, do not have to meet accuracy standards in Japan, allowing issuers to make broad claims without incurring legal liability.
He said that despite self-regulation by industry groups such as the Japan Virtual and Crypto Asset Exchange Association (JVCEA), current technology disclosure is insufficient. This is another reason why the government now wants to bring cryptocurrencies under securities laws.
Self-regulation of virtual currencies is insufficient
Japan’s crypto industry is still in its infancy and has struggled to build the same kind of regulatory discipline that governs traditional finance. Yamaoki argues that while the industry’s main self-regulatory body, the JVCEA, was launched in 2018 with a staff of 32, it is no match for the 373 people who run the Japan Securities Dealers Association (JSDA), which has shaped the industry for 50 years.
“Japan’s crypto industry is too young to regulate itself, but policymakers want to model it after the country’s powerful securities watchdog.”
He hopes that by reclassifying crypto assets from payment instruments to securities, the JVCEA will be designated as a self-regulatory body under the stronger FIEA, giving it broader disciplinary and investor protection powers.
“We need to consider the impact on small providers, but it is also important to ensure transparency and investor protection,” Yamaoki said. “Of course it costs a lot of money for small providers, but I think market development is more important.”
Discover more from Earlybirds Invest
Subscribe to get the latest posts sent to your email.
