Japan to Implement Crypto Regulations by 2024
Japan has a reputation for being deeply rooted in traditions, but it also embraces technological advancements, particularly in the field of cryptography. In fact, Japan played a pioneering role in recognizing the potential of a decentralized digital world and was the first to engage in Bitcoin mining. As a result, Japan has emerged as a global hub for cryptocurrencies. However, it’s worth noting that cryptocurrency is not considered legal tender in Japan as it is not issued by the country’s central bank.
The regulation of cryptocurrencies in Japan falls under the jurisdiction of the Japanese Financial Services Agency (FSA), which works in collaboration with the Japan Virtual Currency Exchange Association (JVCEA) and the Japan Security Token Offering Association (JSTOA). In April 2017, the Payment Services Act (PSA) officially acknowledged Bitcoin as legitimate property, marking a significant milestone in Japan’s regulatory timeline.
Let’s delve into the regulatory framework for cryptocurrencies in Japan:
Regulation of Cryptocurrencies in Japan
Cryptocurrencies are recognized as legal property under the Payment Services Act (PSA). However, the most substantial regulatory changes occurred in May 2020 when amendments were made to the PSA and the Financial Instruments Exchange Act (FIEA). These amendments replaced the term “virtual currency” with “crypto-asset.”
Crypto exchanges operating in Japan are required to register with the FSA and adhere to traditional anti-money laundering (AML) and countering the financing of terrorism (CFT) responsibilities. This ensures that crypto exchanges in Japan operate securely. Additionally, the National Tax Agency of Japan categorizes earnings from cryptocurrencies as “miscellaneous income” since 2017, ensuring that crypto players are taxed accordingly.
The Act of Prevention of Transfer of Criminal Proceeds, enforced by Japan’s financial intelligence unit, JAFIC, takes care of AML standards. Virtual asset service providers are obligated to strictly adhere to know-your-customer (KYC) requirements. Furthermore, only companies with highly qualified Financial Bureau personnel are eligible to operate as crypto exchanges in Japan. International crypto exchanges are also allowed to operate in Japan if they have registered in compliance with the laws of their home countries.
Crypto Regulations in Japan
In October 2018, the Financial Action Task Force (FATF) mandated that crypto asset exchangers and custodians of crypto assets adopt measures to combat money laundering and terrorist financing.
In 2020, several amendments were made to the Payment Services Act (PSA), including the usage of the term “crypto assets” instead of “virtual currencies” since most crypto entities do not function as currencies. Additionally, advertising for “speculative investments” in the crypto world is restricted. The requirements for in-advance alerts for applicants seeking to become crypto asset exchangers have also been made compulsory. Regulations regarding online advertising of crypto asset exchangers have been introduced as well.
Currently, the FSA is developing guidelines for the application of the “crypto travel rule” to Virtual Asset Providers (VASPs), known as APTCP.
In 2021, the Japan Virtual Currency Exchange Association (JVCEA) requested the FSA to require the notification of sender and beneficiary information for crypto asset transfers and to adopt self-regulating rules regarding the Travel Rule by 2022. The JVCEA implemented the Travel Rule in the VASPs Association’s Self-regulation Rules in April 2022. Furthermore, in December 2022, the Cabinet Secretariat amended APTCP to enforce the crypto Travel Rule. In February 2023, the FSA launched a consultation on draft Cabinet Orders to partially revise the enforcement order of APTCP.
Japan also regulated stablecoins in June 2023 to address concerns related to their usage. However, obtaining a license and gaining approval from Japanese regulators for stablecoin operation can take up to a year due to the rigorous requirements.
By March 2024, regulators may eliminate the lengthy pre-screening process for authorized exchanges to list virtual coins.
Taxation on Cryptocurrency
The Japan National Tax Association considers cryptocurrencies as property and taxes them accordingly. Crypto earnings exceeding 200,000 JPY are classified as miscellaneous income and are subject to taxation at rates of up to 55%. This includes profits from trading, mining, and DeFi lending for permanent residents. In comparison, the tax rate on stock profits is 20%.
For example, if an individual bought or sold crypto during the previous fiscal year and earned more than 200,000 JPY, they must declare their crypto holdings on their income tax returns. The amount of tax paid on crypto gains depends on the individual’s Personal Income Tax bracket, with a maximum tax rate of 55% under income tax.
Conclusion
The Japanese government has demonstrated its openness to the crypto world by rewarding local authorities with NFTs for good work. With its progressive regulations and some relaxed policies, Japan is considered an ideal country for engaging with cryptocurrencies.