Despite recent fluctuations in value, the Bitcoin phenomenon shows no sign of slowing. The meteoric rise of the cryptocurrency presents a range of issues that law enforcement agencies, legal regulators and tax authorities must consider in determining how it fits within their existing regulatory frameworks.
Given the convenience of established currency and payment systems, what is driving the ever-growing interest in Bitcoin and other virtual currencies?
Bitcoin and other virtual currencies have been attracting attention in Japan as a new settlement method due to their unique features, which conventional settlement methods (eg, conventional currencies, electronic money and credit cards) do not possess. The principal unique features of virtual currencies are their ability to be remitted overseas within a short timeframe and the low remittance fee. Virtual currencies also enable people in developing countries and minors who cannot own credit cards or bank accounts to conduct online transactions.
In February 2015 MtGox Co, Ltd, one of the most prominent Bitcoin exchange operators, discontinued its business operation. Bankruptcy proceedings commenced in April 2015 and are pending. The bankruptcy of MtGox received widespread media coverage and contributed to an increasingly negative image of Bitcoin for some time. However, this news did not cause fatal damage to the use of virtual currencies. On the contrary, the number of providers of services relating to virtual currencies has been increasing since the incident. Moreover, various new businesses relating to virtual currencies are expected to emerge in the near future.
Has your jurisdiction taken steps to regulate virtual currencies? What is their current status?
The official view of the Japanese government, which was submitted to the House of Councillors on March 7 2014, stated that Bitcoin does not fall under the definition of a 'currency' under Japanese law. Based on this interpretation, it is generally considered that:
- Bitcoin is not subject to the regulations governing "Japanese currency" or "foreign currency" under the Foreign Exchange and Foreign Trade Control Law; and
- money lending is subject to the Money Lending Business Law, taking deposits of money is subject to the Law Concerning the Regulation of Receiving Capital Contribution, Deposits and Interest on Deposits, the act of both money lending and taking deposits of money is subject to the Banking Law and conducting currency exchange transactions is subject to the Banking Law or the Act Concerning Financial Settlement Law. However, Bitcoin, which is not technically currency, is also not deemed to be 'money' and therefore none of the above transactions in relation to Bitcoin are subject to any of the laws which apply to money transactions. A person may thus enter into such transactions in relation to Bitcoin without being subject to registration or licence requirements under such laws.
The document outlining the government's official view also mentioned that the sale or exchange of Bitcoin or any intermediary for such sale or exchange is not subject to the Financial Instruments and Exchange Law or any licence requirement under such law, because Bitcoin is not an instrument which represents any right or interest.
According to the government's official view, no law prohibits the use of Bitcoin for the settlement of debts. Further, no law defines 'Bitcoin' or provides for regulations applicable thereto. No legislation on Bitcoin appears to be scheduled for enactment.
In June 2014 the IT Strategy Special Committee of the Liberal Democratic Party published an interim report on how to address Bitcoin and other virtual currencies. In the report, the committee defined virtual currencies such as Bitcoin as "value records" and recommended that "'mining' or 'exchange' of 'value records'" or "deposit of 'value records' and money with an exchange" not be regulated by law. Instead, it recommended the establishment of industry groups for such value records and the adoption of voluntary guidelines on exchanges where value records and money are exchanged.
To date, some industry groups for business operators which use virtual currencies have been established and have adopted their own voluntary guidelines, as mentioned below.
If virtual currencies were to become a mainstream payment system, how might this affect the ability to control inflation in your jurisdiction?
It is generally thought that inflation of bitcoins will not occur, because a limit on the quantity of bitcoins to be issued has been fixed. However, inflation may nonetheless occur due to circumstances such as fluctuations in demand and supply. One economist has pointed out that hyperinflation of bitcoins is inevitable due to the fact that there is no organisation akin to a central bank to control the issuance of bitcoins. A research paper issued by a securities firm has questioned whether bitcoins could function as a way to save value – which is one of the fundamental elements of currency – since Bitcoin is highly volatile and lacks an issuing entity and underlying assets. Although another economist has predicted that the government will take regulatory measures on the issuance quantity of Bitcoin if it becomes a major settlement method, whether this possibility will come to pass remains to be seen.
What are the potential risks of virtual currencies in terms of fraud? How would these be addressed in your jurisdiction? Have any specific instances emerged in which virtual currencies have been used for money-laundering or other fraudulent purposes?
Since virtual currencies such as Bitcoin have a high degree of anonymity, they are likely to be used for illegal transactions or money laundering.
According to the government's official view, use of Bitcoin to settle a transaction for the purpose of money laundering may constitute a crime under the Act for Punishment of Organised Crime and Control of Crime Proceeds and Other Matters if such settlement is deemed to be an "act to disguise a fact in relation to acquisition or disposition of crime proceeds, etc. or act to hide crime proceeds".
The Act Concerning Prevention of Transfer of Crime Proceeds also requires certain business operators to confirm certain matters, including those necessary for identity verification, when entering into certain transactions with customers, regardless of whether Bitcoin is used in the transaction. However, no legislation targets Bitcoin or other virtual currencies.
The guidelines of the previously mentioned industry groups require members of such groups to conduct identity verification, report suspicious transactions to the group and preserve transaction records for a certain period, among other things.
Although it appears that there have been no cases of money laundering involving virtual currencies, there has been a case in which Bitcoin was used to purchase illegal drugs.
For further information on this topic please contact Izuru Goto or Kaoruko Kasai at City-Yuwa Partners by telephone (+81 3 6212 5500) or email (firstname.lastname@example.org or email@example.com). The City-Yuwa Partners website can be accessed at www.city-yuwa.com.
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