Japan was the first country to establish a regulatory framework for crypto-assets. Due to this head start, blockchain technology is now being increasingly adopted in the Japanese financial industry. For example, there are 29 licensed crypto-asset exchange service providers in Japan (“exchange providers”) as of 31 March 2024.

In line with this, on 4 March 2022, the Bill for Partial Amendment to the Act on Payment Services Act, etc. for the Purpose of Establishing a Stable and Efficient Funds Settlement System (the “Amendment Act”) was submitted to the Diet. It was approved on 3 June 2022, and subsequently came into effect in June 2023.

The Amendment Act aims to establish a stable and efficient funds settlement system that can respond to the digitalisation of finance and other fields, against the backdrop of:

• the increasing issuance and circulation of so-called stablecoins overseas;
• the growing need to further improve the effectiveness of transaction monitoring by banks, etc; and
• the spread of prepayment instruments that enable payment by electronic means.

In addition, in response to the increasing issuance and circulation of so-called stablecoins overseas, the Amendment Act also introduces the concept of “electronic payment instruments” (EPIs), which corresponds to the concept of stablecoins (items in Article 2, paragraph 5 of the Amended Payment Services Act (the “Amended PSA”).

The Amendment Act also provides a new definition of intermediary activities in respect of the transfer and management of stablecoins that constitute EPIs. Specifically, under the Amendment Act, such activities are defined as “electronic payment instruments exchange services” and “electronic payment-handling services”. Furthermore, the Amendment Act introduces a registration system in respect of businesses engaged in such activities.

Since 2020, security tokens, sometimes referred to as digital securities, have been in the spotlight. As a result of recent amendments to the relevant laws and regulations, an increasing number of financial institutions are entering this new market, focusing mainly on digital corporate notes and tokenised equity interests in real estate funds. In addition, on 25 December 2023, Osaka Digital Exchange Co, Ltd announced the commencement of trading of security tokens on START, a private trading system for security token transactions. As Japan’s first secondary distribution market for security tokens, START aims to support flexible financing for companies and to provide investors with a wide range of investment opportunities.

Furthermore, since late-2020, non-fungible token (NFT)-related businesses have been gaining traction, particularly in the online gaming and art sectors, and a number of platforms for the issuance and trading of tokenised digital artworks have also recently emerged.

More recently, in April 2024 the Liberal Democratic Party (LDP), the ruling party in Japan, released a “Web3 White Paper 2024” that included a summary of issues needing immediate resolution for the promotion of Web3, as well as proposals for accompanying legislative revisions.

These developments demonstrate that Japan has adopted the promotion of Web3, including NFTs and decentralised autonomous organisations (DAOs), as a national strategy.

The legal nature of crypto-assets under Japanese civil law statutes is still unclear. According to a judicial precedent of the Tokyo District Court dated 5 August 2015, legal ownership or title does not apply to crypto-assets as they are intangible assets. As a consequence, the transfer of a crypto-asset does not equate to the transfer of legal ownership or title in that crypto-asset under the Civil Code.

Furthermore, from the perspective of the Civil Code, it is unclear when transfers of crypto-assets via a blockchain network would be considered final, as the legal characteristics of crypto-assets have not yet been firmed up.

Digital assets generated and traded on a blockchain are not necessarily classified as crypto-assets. Rather their legal statuses vary depending on the function of the digital asset in question, and on other factors.

For example, if a digital asset is prepaid and can only be used for settlement with specified persons (ie, at member stores) to the extent of the amount prepaid, and if it is prohibited (in principle) from being replenished, the digital asset may be classified as a prepaid payment instrument (PPI), while those that can be replenished in value may be classified as electronic money issued by fund transfer service providers.

With the development of blockchain technology, so-called security tokens – or digital assets that represent shares, corporate bonds, fund interests, etc – have also emerged, and these are treated as securities, based on their nature and functions.

More specifically, if profit is distributed to the digital asset holder from the business income of the digital asset issuer, such digital asset would be classified as a security under the Financial Instruments and Exchange Act (FIEA). If no profit is distributed, the next factor to consider is whether the digital asset is issued for consideration. Digital assets that are issued for no consideration will likely be deemed unregulated service points. Where a digital asset is issued for consideration, its legal status will depend on whether the digital asset constitutes a currency-denominated asset.

If a digital asset constitutes a currency-denominated asset, it will constitute either a PPI, electronic money issued by fund transfer service providers or an EPI (discussed in 2.4 Stablecoins).

On the other hand, a digital asset that does not constitute a currency-denominated asset, and that is usable vis-à-vis unspecified persons and can be bought, sold or exchanged vis-à-vis unspecified persons, will (in principle) likely be deemed a crypto-asset.

The FIEA has conventionally classified securities into:

• traditional securities, such as shares and bonds (Paragraph 1 Securities); and
• contractual rights, such as trust beneficiary interests and interests in collective investment schemes (Paragraph 2 Securities).

While Paragraph 1 Securities are subject to relatively stricter requirements in terms of disclosures and licensing/registration as they are highly liquid, Paragraph 2 Securities are subject to relatively looser requirements as they are less liquid.

However, if securities are issued using an electronic data processing system such as blockchain, it is expected that such securities may have higher liquidity than securities issued using conventional methods – regardless of whether they are Paragraph 1 or Paragraph 2 Securities. For this reason, a new regulatory framework exists through the FIEA for securities that are transferable via electronic data-processing systems. Under the FIEA, such securities are classified into the following three categories:

• Paragraph 1 Securities, such as shares and bonds, which are transferable using electronic data-processing systems (Tokenised Paragraph 1 Securities);
• contractual rights such as trust beneficiary interests and interests in collective investment schemes, which are conventionally categorised as Paragraph 2 Securities and are transferable using electronic data-processing systems (electronically recorded transferable rights (ERTRs)); and
• contractual rights such as trust beneficiary interests and interests in collective investment schemes, which are conventionally categorised as Paragraph 2 Securities and are transferable using electronic data-processing systems, but which have their negotiability restricted to a certain extent (Non-ERTR Tokenised Paragraph 2 Securities).

An issuer of Tokenised Paragraph 1 Securities or ERTRs is, in principle, required to file a securities registration statement (as is the case for traditional Paragraph 1 Securities) before making a public offering or secondary distribution, unless the offering or distribution falls under any category of private placements. Any person who engages in the business of the sale, purchase or handling of the offering of Tokenised Paragraph 1 Securities or ERTRs is required to undergo registration as a Type 1 Financial Instruments Business Operator (“Type 1 FIBO”).

In light of the higher degree of freedom in designing Tokenised Paragraph 1 Securities or ERTRs and the higher liquidity of these securities, a Type 1 FIBO that handles these digital securities will be required to control risks associated with digital networks, such as the blockchain used for digital securities.

As noted in 1.1 Evolution of the Blockchain Market, in response to the increasing issuance and circulation of so-called stablecoins overseas, the Amendment Act has introduced the concept of EPIs, which corresponds to the concept of stablecoins.

The Amendment Act stipulates four categories of EPIs, as follows (Article 2, paragraph 5 of the Amended PSA):

• currency-denominated assets that are recorded and transferred electronically, that are usable for paying consideration to unspecified persons and that may be purchased from or sold to unspecified persons (“Type I EPI”);
• a property value exchangeable with a Type I EPI with an unspecified counterparty, and transferable by means of an electronic information-processing system (“Type II EPI”);
• specified trust beneficiary rights (“Type III EPI”); and
• such instruments as may be specified by Cabinet Order as being equivalent to those listed in the preceding three items (“Type IV EPI”).

Regarding the definition of a Type I EPI, “currency-denominated assets” are defined as assets denominated in Japanese yen or in a foreign currency, or with respect to which the performance, repayment or any other activity equivalent thereto will be carried out in Japanese yen or in a foreign currency. Based on this definition, a digital coin whose value is pegged to the Japanese yen, US dollar or any other fiat currency (such as, for example, where the price of a digital coin is always fixed at one yen or dollar, or where a digital coin is redeemable at one yen or dollar) may fall within the definition of a Type I EPI, but would not fall within the definition of crypto-assets.

In view of the above, so-called algorithmic stablecoins that are not collateralised by fiat currency but whose values are linked to fiat currency through an algorithm are unlikely to qualify as currency-denominated assets. Such algorithmic stablecoins will likely fall within the category of crypto-assets if they are transferable or tradeable with unspecified parties on the blockchain.

Type I EPIs and other currency-denominated assets are distinguished by the following factors:

• (i) whether they may be used as payment for consideration to unspecified persons; and
• (ii) whether they may be purchased from or sold to unspecified persons.

More specifically, PPI and electronic money that are issued by fund transfer service providers do not satisfy condition (i) above, as their issuers would centrally manage the balance of each user and the scope of accepting stores (member stores).

Additionally, even though digital money is issued on a blockchain, it will not satisfy condition (ii) above if its issuer has taken technical measures to allow the digital money to be transferred only to persons who have passed confirmation at the time of transaction (ie, know-your-customer (KYC)), and if the issuer’s consent or other involvement is required for each transfer of the digital money. Consequently, only permissionless stablecoins (eg, USDT and USDC) would typically be considered as falling within the definition of Type I EPIs, as permissionless stablecoins generally do not require KYC of new stablecoin holders or any other involvement of the issuer when transferred.

Since EPIs must be property value-denominated in a legal currency, and issuance and redemption of EPIs enable parties across long distances to pay and receive funds without directly delivering cash, the issuance and redemption of EPIs thus constitute “fund remittance transactions” (kawase-torihiki). Consequently, a banking licence or fund transfer business registration would, in principle, be required in order to issue and redeem EPIs. In addition, trust companies and foreign trust companies are also permitted to issue EPIs, though they are only permitted to issue Type III EPIs (specified trust beneficiary rights).

It is also worth noting that it is not possible for a crypto-asset exchange service provider (CAESP) to list EPIs on its exchange without being registered as an electronic payment instruments exchange service provider (EPIESP). More specifically, a person who engages in activities including but not limited to the following electronic payment instruments exchange services is required to be registered as an EPIESP:

• sale and purchase of EPIs, or exchange of EPIs for other EPIs;
• intermediary, brokerage or delegation activities in respect of such sale, purchase or exchange; and
• management of EPIs for the benefit of another person.

NFTs are generally non-substitutable tokens that are issued on a blockchain, with values and attributes unique to the token itself. The issue in this context is whether NFTs constitute crypto-assets (as defined in 4.1.1 Regulatory Overview) under the PSA, since NFTs, like crypto-assets, are tokens issued on the blockchain.

In this regard, according to the Crypto-Asset Guidelines dated 24 March 2023 and issued by the Financial Services Agency of Japan (JFSA), a factor for determining whether a token constitutes a Type I crypto-asset (as defined in 4.1.1 Regulatory Overview), is whether the token is an asset that can be purchased or sold using legal fiat currency or crypto-assets under socially accepted norms. Specifically, a token that satisfies both listed items below will generally not constitute a Type I crypto-asset, and the same applies to the determination of whether a token constitutes a Type II crypto-asset (as defined in 4.1.1 Regulatory Overview).

• Where the issuer, etc, has made it clear that the token is not intended to be used as payment for goods, etc, to unspecified parties. This can be achieved by (for example) stating clearly in the terms and conditions of the issuer or its business handling service provider, or in the product description, that use of the token as a means of payment to unspecified parties is prohibited, or that the token or related system is designed in a way that does not enable it to be used as a means of payment to unspecified parties.
• Where use of the token as a means of payment for goods, etc, to unspecified parties is permitted, certain requirements on the price and quantity of the relevant goods, etc, and on the technical characteristics and specifications of the token must be met. For example, at least one of the following characteristics must be present:
1. the minimum value per transaction must be sufficiently high (ie, JPY1,000 or more); or
2. the number of tokens issuable as a proportion of a transaction of minimum value is limited (ie, not exceeding one million).

In general, there is no limitation on the use of crypto-assets for payments. Accordingly, payments are allowed to be made with crypto-assets in Japan. It should be noted, however, that under the Foreign Exchange and Foreign Trade Act, notification to the Minister of Finance is required when a payment is made or received between Japan and a foreign country, or between a resident and a non-resident, in an amount exceeding the equivalent of JPY30 million. This notification requirement is applicable both where payment in crypto-assets is made or where payment in crypto-assets is received.

Under Japanese law, ownership rights generally do not apply to crypto-assets that do not have a physical form. As a result, a security interest cannot be created over crypto-assets themselves. However, if crypto-assets are deposited with a custodian, it is possible to create a pledge or similar rights over the claim to recover the crypto-assets from the custodian. As a result, it is possible to provide financial services, such as loans, using the right to demand the return of crypto-assets as collateral.

There is no clear definition of “smart contracts” under Japanese law, nor is there any specific regulation of smart contracts in Japan.

The authors understand smart contracts to generally mean self-executing contracts containing terms that are predetermined pursuant to specific programming codes on blockchain. The use of smart contracts may raise issues of their validity and enforceability as legal contracts. However, such issues may be offset by the fact that smart contracts are effectively enforceable regardless of their legal validity.

For instance, a smart contract would be automatically enforced and irrevocable even if such contract is invalid and unenforceable for violating applicable law. It should be noted that there is currently no judicial precedent in Japan addressing the legal enforceability of such smart contracts.

Considering the risks posed by crypto-assets, the JFSA has, through dialogue with financial institutions, requested them to minimise their acquisition of crypto-assets. In addition, under the subordinate regulations of the Banking Act and the supervisory guidelines, banks are:

• required to establish measures for ensuring sound and appropriate business management in respect of their handling of crypto-assets; and
• prohibited from holding crypto-assets for the purpose of investment.

Crypto-asset funds are substantially prohibited, and only funds in the form of certain partnership structures are permitted to invest in crypto-assets.

To encourage fintech innovation, including the development and usage of blockchain technology, in June 2018 the Japan Economic Revitalisation Bureau established a cross-governmental one-stop desk for a regulatory sandbox scheme in Japan.

This scheme, available to foreign and to Japanese companies, enables applicants (once approved) to carry out, under certain conditions, a demonstration of their projects even if such activities are not yet covered under current laws and regulations. Blockchain technology, together with AI, IoT and big data, is explicitly mentioned in the basic policy of the regulatory sandbox scheme as a prospective and suitable area for exploration and development.

In 2017, based on the FATF’s suggestions that virtual currencies could be used for money laundering, the APTCP was amended to include CAESPs as “specified business operators” and to impose an obligation on CAESPs to verify the identity of their customers.

Under the APTCP, specified business operators must verify the identity of their customers, and must comply with the APTCP and rules issued thereunder.

The JFSA has supervisory powers over CAESPs based on the delegation of such powers to it from the Prime Minister.

As a result, the JFSA has the power – where necessary for the proper and secure provision/performance of CAES by a CAESP – to:

• order the CAESP to submit additional reports or materials;
• enter the office or other facilities of the CAESP to conduct inspections; and
• enquire about the status of the CAESP’s business or properties, or inspect its books and documents.

The JFSA can also sub-delegate its supervisory powers over CAESPs to the relevant Local Finance Bureau, which are organs of the Ministry of Finance directed and supervised by the JFSA Commissioner.

For purposes of ensuring proper provision of CAES and protecting users of CAES, the JVCEA was appointed as an approved self-regulatory organisation to regulate CAESPs. The primary objectives of the JVCEA are:

• the formulation of self-governance rules;
• the inspection of its members to ensure their compliance with the relevant self-governance rules; and
• the handling of user complaints.

The Japanese government has a generally positive view of the use of blockchain technology in various kinds of businesses.

For instance, in June 2019 the Japanese government published a “Growth Strategy Action Plan” discussing the importance of the use of blockchain technology, stating that “AI, IoT, robots, big data, blockchain... are general purpose technologies (GPT) that broadly affect all industries, similar to the adoption of electric power from the 19th to 20th century and the inroads made by IT through the end of the 20th century”.

In addition, as stated in 1.2 Business Models, in April 2024 the LDP released a “Web3 White Paper 2024” containing a summary of issues needing immediate resolution for the promotion of Web3, as well as proposals for accompanying legislative revisions.

An important judicial precedent of the Tokyo District Court dated 5 August 2015 states that legal ownership or title does not apply to crypto-assets, as they are intangible assets. As a consequence, the transfer of a crypto-asset does not equate to the transfer of legal ownership or title in such crypto-asset under the Civil Code of Japan.

In 2018, following the leakage of users’ crypto-assets with a value of approximately USD530 million from a cyber-attack on one of the biggest CAESPs, the JFSA conducted sweeping on-site inspections of registered and provisional CAESPs. This was followed by the JFSA’s announcement, on 8 March 2018, of the imposition of business suspension orders on two provisional CAESPs, and of business improvement orders on two registered CAESPs and on three provisional CAESPs. After further review, on 22 June 2018 the JFSA also imposed business improvement orders on six additional major registered CAESPs.

In addition, on 21 June 2019 the JFSA imposed a business improvement order on a CAESP for the inadequacy of its business management, AML/CTF and risk management systems, among other things.

More recently, on 10 November 2022, FTX Japan received an administrative disposition from the JFSA, including a business suspension order and a business improvement order, amid the financial difficulties experienced by its parent company, FTX Trading Limited. On 11 November 2022 (US time), FTX Trading and its group companies filed for Chapter 11 proceedings under the US Federal Bankruptcy Code; FTX Japan and its parent company, FTX Japan Holdings, were included in the filing.

Additionally, the JFSA has been issuing warnings to crypto-asset service providers (including offshore entities) that offer services to residents of Japan without registration with the JFSA, instructing them to cease such activities immediately. In 2023, the JFSA announced that it had issued five such warnings.

One of the most important issues in Japanese taxation of crypto-assets was the treatment of consumption tax. Prior to June 2017, the sale of crypto-assets was subject to consumption tax if the office of the transferor was located in Japan. However, following tax reforms in 2017, transfers of crypto-assets conducted in Japan from July of that year onwards are no longer subject to consumption tax. It is important to note, however, that consumption tax is still applicable to compensation received in relation to the lending of crypto-assets.

With respect to individual income tax, the National Tax Agency of Japan treats gains realised from the sale or use of crypto-assets as “miscellaneous income” (zatsu-shotoku) and considers that taxpayers will not be permitted to utilise losses elsewhere to offset gains realised from the sale or use of crypto-assets. Furthermore, inheritance tax will be imposed on crypto-assets in the estate of a deceased person.

In terms of corporate tax, corporations must perform market value assessments for the crypto-assets they possess that have an active market at the end of each fiscal year, and must record any difference between the book value and the market value as profit or loss. This end-of-period market valuation taxation poses a significant barrier for Japanese companies looking to enter the Web3 space.

However, the tax reform in 2023 stipulated that end-of-period market valuation taxation does not apply if certain conditions are met – such as continuous ownership since issuance and compliance with transfer restrictions – for crypto-assets issued by the corporation itself at the end of the fiscal year.

Additionally, the 2024 tax reform allows for exemption from end-of-period market valuation taxation for non-self-issued crypto-assets held by a corporation at the end of the fiscal year, provided they meet certain conditions, such as compliance with certain transfer restrictions.

The authors are not aware of any ESG/sustainable finance requirements that apply specifically to digital assets in Japan.

Business operators using blockchain technology may be subject to the Act on the Protection of Personal Information (APPI) if they handle personal information.

Considering that a public blockchain involves the sharing of a database among unspecified participants, where information on the blockchain will not (in principle) be deleted or retracted once uploaded on the blockchain, the use of blockchain technology may trigger the application of the APPI. For example, Article 19 of the APPI requires business operators who handle personal information to delete unnecessary personal information once the purpose for which such personal information was required has been achieved. However, a business operator that records the personal information of its users on a blockchain may have difficulty deleting such information, and this could result in a violation of the APPI.