Japanese regulators propose to overhaul the cryptocurrency rules in line with securities laws

The Japanese Financial Services Agency (FSA) has proposed a proposal to significantly strengthen crypto regulations.

A FSA report on Tuesday recommends that cryptocurrencies be regulated under the Financial Instruments and Exchange Act (FIEA) and move from under the Payment Services Act. It aims to enhance investor protection and to align crypto surveillance with securities regulations.

Regulators said that it may be appropriate to apply similar mechanisms and enforcement, as many issues within the code resemble the issues traditionally addressed under the FIEA.

Important issues of crypto investment highlighted in the report include unclear white papers, inaccurate disclosures, unregistered operations, investment fraud, low risk tolerance, and security concerns within the exchange.

A rough translation of the report states:

“Therefore, it may be appropriate to address them (crypto assets) using mechanisms and enforcement of financial instruments and exchange laws.”

The report is not legally binding. This is an internal briefing document created by the FSA Secretariat to present ideas to the Financial System Council. The council is the formal advisory body to the Japanese Minister of Financial Services, and the government decides whether new rules are needed.

The headquarters of financial services institutions, Japan’s common gate. sauce: Wikimedia

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Cryptocurrency is on the rise in Japan

The report states that Crypto is playing an increasingly important role in the Japanese economy, with the total number of openings held at domestic cryptocurrency exchanges exceeding 12 million, with user deposits remaining at 5 trillion yen ($33.7 billion). This is roughly equivalent to one crypto exchange account for every 10 people.

Still, it highlighted that small transactions dominate in Japan, with over 80% of individual accounts holding under $675.

The FSA also noted that 7.3% of people with experience in investing have more crypto than those who trade FX or hold corporate bonds. Approximately 70% of Japanese crypto owners are middle-income people, and 86% of users trade in the hopes of a long-term price increase.

The FSA report follows the recent recognition of the Minister of Finance in Japan that cryptocurrencies deserve a location for a diversified investment portfolio. “Cryptocurrencies pose a risk of high volatility by establishing a suitable investment environment, but they can become a diversified investment option,” he said in late August.

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The stricter rules for cryptography

Under FIEA, cryptocurrencies are already treated as financial equipment when used as the underlying assets of derivatives.

Applying the Financial Instruments and Exchange Act as a whole will impose disclosure requirements on crypto issuers of securities on public services and secondary distribution. This “eliminates information asymmetry between issuers and investors,” the FSA said.

The FIEA rules also regulate brokers and securities companies for the sake of buying and selling. They also enforce rules against unfair transactions and provide enforcement measures including emergency injunctions against unregistered businesses.

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