An overview of the cryptocurrency regulations in Japan

Japan toward cryptocurrency adoption

With Satoshi Nakamoto being a Japanese name, bumping into Japan when talking about regulations in cryptocurrency is quite common. The Japanese have been rooted in traditions yet open to technological innovations. This resulted in the Japanese playing a prominent role in the domains of computer science and cryptography.

The Japanese were among the first to recognize the potential of a digital decentralized ecosystem and begin mining Bitcoin. In the early days of cryptocurrencies, Japan emerged as the cryptocurrency hub of the world. Many were mining Bitcoin (BTC) despite the cryptocurrency having little actual value. Mt. Gox, the world’s biggest cryptocurrency exchange back then, was a Japanese company handling millions of Bitcoin transactions.

Even after Mt. Gox lost a large sum of money in a February 2014 hack, the Japanese government didn’t block cryptocurrency entirely. Rather, it took measures to protect consumers. In 2016, the country recognized cryptocurrency as a type of money.

According to Japan’s Ministry of Economy, Trade and Industry, cashless payments accounted for only 26.8% of payments in 2019. Digging deeper, a 2020 Statista survey found only 4% of Japanese residents used or owned cryptocurrencies, whereas China, India and Vietnam reported 7%, 9% and 21%, respectively. The pandemic, however, has encouraged a shift away from cash.

In September 2022, the government of Japan awarded nonfungible tokens (NFTs) to seven mayors for the initiatives they undertook in their areas. This placed them among the first national governments to issue NFTs as supplementary rewards using advanced digital technology.

The stability of the yen has been a factor in restraining cryptocurrency growth. Countries with more inflationary pressure on fiat currency, such as Turkey, are likely to have higher rates of cryptocurrency adoption. When a fiat currency is stable, there are fewer reasons for enterprises or individuals to get into cryptocurrencies that are relatively volatile.

The introduction of stablecoins pegged to the yen had a role in drawing more people to the cryptocurrency arena. For instance, JPYCoin, a stablecoin launched in January 2021, could be used to shop on Amazon. A stablecoin is a kind of cryptocurrency whose value is pegged to a conventional asset class, such as a fiat currency or gold, which helps stabilize its price. Another factor that had a bearing on the adoption of cryptocurrency was the shrinking, aging population. A younger population is more likely to own crypto assets than older generations. 

Additionally, vibrant competition in Japan among various crypto exchanges and continued investment from established crypto enterprises such as Rakuten have made the crypto assets market in the country look dynamic. A well-contoured regulatory environment in Japan has helped genuine crypto projects prevail, eliminating the bad ones in the bud. With crypto reforms in 2023 on the cards, crypto projects are looking toward a simplified regulatory environment.

Do Japanese banks allow cryptocurrency?

The Japanese government doesn’t consider cryptocurrency as a legal tender, as it isn’t issued by a central bank. However, they recognize its purchasing power. Banks that were initially dragging their feet on cryptocurrencies have gradually moved toward launching their own coins or adopting the underlying decentralized ledger technology to augment their own operations.

A bank will work with any entity handling cryptocurrencies only when it undertakes to Know Your Customer (KYC) checks stringently and keeps track of suspicious transactions. Any entity dealing in cryptocurrencies needs to vet the identification data of customers by ascertaining the nature of performing transactions. They are required to maintain verification and transaction records for at least seven years.

Cryptocurrency rules in Japan mandate any individual or organization to report a questionable transaction to the appropriate authority. Any transaction upward of 30 million JPY, whether in cryptocurrency or fiat, needs to be notified to the Ministry of Finance, in compliance with the Foreign Exchange and Foreign Trade Act. 

How to buy cryptocurrencies in Japan

Japanese regulators are quite clear about the governance of crypto exchanges, KYC and Anti-Money Laundering (AML) procedures, and taxation policy. One can buy and sell cryptocurrencies on exchanges approved by regulators. The choice could depend on factors such as fees, payment methods allowed, availability of coins, ease of use, customer support, educational resources, user interface and more.

For a beginner, the procedure to buy cryptocurrencies is more or less common. They need to download a crypto wallet on their mobile phones, go through the KYC procedure, add debit or credit card information, complete the buying process, and transact cryptocurrency from the exchange to their own wallet.

Is cryptocurrency regulated in Japan?

The Japanese Financial Services Agency (FSA) regulates cryptocurrency in Japan. It works with the Japan Virtual Currency Exchange Association (JVCEA) and the Japan Security Token Offering Association (JSTOA) for regulatory purposes. The JVCEA creates rules and policies for crypto exchange service providers while the JSTOA supervises token offerings and other crowdfunding events. Over time, Japanese lawmakers have tightened digital assets regulations on derivatives trading.

In an October 2022 speech, Fumio Kishida, the prime minister of Japan, said the government has plans to digitize national identity cards. This entails the issuance of NFTs to local authorities through digital solutions. The government is also encouraging the use of Web3 services that utilize the metaverse.

The Payment Services Act (PSA) deems crypto assets payment as methods that are not denominated in fiat currency and used for paying unspecified persons. It mandates crypto asset exchange services to register with the Financial Services Agency. The law places no restrictions on any citizen owning and investing in cryptocurrencies.

Cryptocurrency custody service providers are covered by the PSA, while cryptocurrency derivatives companies are regulated under the Financial Instruments and Exchange Act (FIEA). Exchanges in Japan need to comply with the AML regulations laid down in the Act on the Prevention of Transfer of Criminal Proceeds (APTCP). This sct has set up AML standards for crypto assets that are implemented by the Japan Financial Intelligence Center (JAFIC) and the Financial Intelligence Unit (FIU).

Japanese lawmakers have framed exchange-based rules with the view to safeguard market integrity. Revisions of regulations in 2016 and 2019 mandated custody service providers to incorporate client identity checks. Rules require exchanges to adhere to specific record-keeping standards and submit an annual compliance report to the FSA.

Regarding the definition of Financial Instruments Service Operators, the Japanese law includes the development of business management systems, techniques for displaying ads, methods to transmit electronic data of customers and sharing information with consumers, among other things.

On cryptocurrency transactions, authorities might ask users for information such as the wallet address used for sending or receiving the funds, a geographical address and a customer identification number. 

Does Japan allow cryptocurrency trading?

The PSA allows only companies with a highly qualified financial bureau to function as cryptocurrency exchanges. International cryptocurrency exchanges, however, may operate if they can prove an equivalent registration standard.

After an array of breaches, including a $530-million digital currency heist, regulations were tightened to enable trading amid adequate checks and balances. The Financial Services Agency of Japan has increased its efforts to enforce trading and exchanges.

To get into cryptocurrency trading, an entity needs to sign up with the FSA, a process with strict cybersecurity and AML requirements. AML standards for crypto assets in Japan are implemented by the Financial Intelligence Unit (FIU) and the Japan Financial Intelligence Center (JAFIC). Along with AML, crypto asset exchanges are required to undertake counter-terrorism funding measures. AML standards require the regulated entities to:

  • Record and verify the identity of customers
  • Record and verify transactions
  • Report suspicious transactions to the Financial Services Agency
  • Monitor politically exposed persons.

The Japan Virtual and Crypto Assets Exchange Association has plans to loosen the screening process to simplify the listing of digital currencies for authorized exchanges. This applies to tokens that already exist in the Japanese market. By March 2024, the regulators are likely to do away with the lengthy pre-screening process.

Japanese law has restricted commercials for speculative investments in the crypto world. The law categorically mentions forbidden actions, requires exchanges dealing in crypto assets to take precautions for user security, and share information with users regarding the techniques used for handling their monetary and crypto assets.

Is cryptocurrency taxable in Japan?

The National Tax Agency (NTA) in Japan classifies earnings on cryptocurrencies as “miscellaneous income” and deals with taxpayers accordingly. Permanent citizens need to pay tax on income earned from cryptocurrency trading, Bitcoin mining and decentralized finance (DeFi) lending. Anyone earning cryptocurrency worth over 200,000 JPY can be taxed at rates up to 55%, though the exact rates depend on the bracket one’s income falls in. Non-permanent residents, however, pay a flat 20% tax on all income earned.

Here is a table mentioning the income tax slabs and corresponding tax rates on one’s cryptocurrency earnings. It excludes the 10% local inhabitant’s flat tax rate.

Crypto laws in Japan consider most types of cryptocurrencies and utility tokens as crypto assets. These include crypto tokens used as digital currencies, such as BTC and Ether (ETH), fiat currency-pegged stablecoins and NFTs. However, tokens referring to shares, bonds or other securities-like financial products are classified as a security token type under the Financial Instruments and Exchange Act (FIEA).

Functions like investing in a crypto project or purchasing goods and services with a cryptocurrency are considered regular crypto transactions, attracting taxes as per the slab.

When one receives cryptocurrency as a gift, they need to set its acquisition cost to the market value. The content and nature of the crypto asset are factored in when determining the price. In case one trades away the gift, they are liable to pay taxes over the difference between the sale price of the cryptocurrency and its cost of acquisition.

An airdrop is also regarded as a gift. As the value of an airdrop is close to none in most cases, there is no income earned at the time of acquisition. However, when one sells airdropped tokens at a future date, they have to pay taxes.

Taxation laws regard unrealized capital gains on crypto assets as income at the end of each fiscal year (on March 31), making one liable to pay taxes. The law doesn’t allow taxpayers to carry forward any capital losses resulting from cryptocurrency transactions in the years forward. Taxpayers are required to file taxes based on the previous year ending on Dec. 31 by March 15 of the following year.

One doesn’t need to pay taxes if crypto assets are stolen. This is, however, case-dependent, and one needs to contact the NTA before filing tax. Capital gains tax is payable on cryptocurrency used for paying transfer fees when one is moving assets. However, no tax is payable if one is transferring crypto assets between their own wallets.

Though the tax regime in Japan is well-defined, taxes are high. This has led to proposed tax reforms in 2023 that are expected to create momentum for the Web3 industry in the country.

Written by Dilip Kumar Patairya