Legal status of cryptocurrencies in Japan

Today in the blockchain industry there is high uncertainty about the status of cryptocurrency. And although the future of Bitcoin largely depends on its legal status, many countries are not ready to formulate their official position regarding virtual money. Japan has demonstrated an intermediate approach. On the one hand, not recognizing cryptocurrency as national money, on the other hand, allowing and taking under state control all operations in the cryptocurrency market.

The path to Bitcoin recognition in Japan was not easy. Until March 2014, the National Bank of Japan did not have any plans to regulate the cryptocurrency market. However, the February collapse of the MtGox exchange, based in Tokyo, forced Japanese authorities to announce the need to regulate this market. As a result, after studying and analyzing the Bitcoin market, legal regulations were developed to regulate the exchange of virtual currencies. Japan has approved Bitcoin regulation similar to fiat currencies and passed a virtual currency law in April 2017. And although the state adheres to an intermediate approach, defining Bitcoin as a “carrier of value equal to assets,” the land of the rising sun has become a very promising jurisdiction for cryptocurrencies.

Government regulation affected three main areas:

The first direction is the legal concept of Bitcoin and virtual currency.

The Law on Virtual Currency, although it recognized the cryptocurrencies Bitcoin and Ethereum as money that has “functions similar to money,” but did not declare them a legalized currency, but only an official means of payment that could “perform the functions of a currency.” According to the law, firms can now use cryptocurrency for mutual settlements with each other. Additionally, companies and individuals can purchase this virtual money as a commodity. The law defines cryptocurrencies as “carriers of value equivalent to assets that can be used to make payments and be transferred digitally.”

The second direction is regulation of the cryptocurrency market.

Creation of a civilized cryptocurrency market with clear rules and consumer protection. New Japanese regulations require cryptocurrency exchanges to adopt established KYC/AML standards used in other countries, obtain a license to trade virtual currencies, and be required to register with the Financial Services Agency of Japan (FSA), which regulates the issuance of the national currency. Two months are given to make a decision on issuing a license. If a company is denied a license, it must cease operations in Japan. Only Japanese resident companies can obtain such a license. 

The third direction is taxation..

Tax reform effective July 1, 2017, exempted virtual currency from the eight percent Japanese consumption tax (“JCT”). This is analogous to value added tax (VAT). JCT is payable when purchasing most goods and services in Japan. At the same time, income from virtual currency is regarded as other income and is considered business income, which means it is subject to income and capital gains tax.

Japan also holds a leading position in the issue of ICO regulation. Although Japan does not have specific laws for initial coin offerings, this area is regulated by current legislation. The Virtual Currency Payment Services Act regulates the issuance of tokens. So the company issuing coins must register with the financial bureau at the location of the ICO. If ICOs are intended as investments, then the Law on Exchanges and Financial Instruments comes into force and the initial placement is regulated by it.

The Japanese government’s clear and practical steps to regulate cryptocurrencies, the legalization of Bitcoin, made it possible to strengthen confidence in virtual money, create a more stable, controlled market, and attract foreign investors. 

Despite the fact that not all points are still clear and there are still issues that require improvement, the legislative initiative is aimed, first of all, at creating an effective ecosystem for Bitcoin users. Such a system provides for unhindered cryptocurrency trading, simplified taxation, and a protected exchange market.