VCs in Japan
Regulatory concerns
AML and CFT compliance by VC exchange operators
Outlook for VC exchange operators in Japan


Since their advent, cryptocurrencies and virtual currencies (collectively, VCs), such as bitcoin, have been the subject of much speculation and discussion as to their economic potential, utility and role in the financial markets. Broadly speaking, VCs are based on blockchain technology, which allows for the settlement of transactions in a decentralised manner outside traditional settlement systems.

Given the anonymity offered by VCs, the risk that they will be used to facilitate inappropriate or illegal financial transactions is a significant concern for many regulators. Such regulators are struggling with how to encourage the continued growth of the promising technology offered by VCs, while ensuring proper regulation and oversight of the financial markets – in particular, ensuring that VCs are not used to circumvent anti-money laundering (AML) and prevention of criminal financing of terrorism (CFT) regulations. This article provides a brief summary of the approach taken to date by Japanese regulators with respect to VCs before discussing recent developments and the regulatory outlook for VCs in Japan.

VCs in Japan

The Japanese Financial Services Agency (JFSA) has generally been receptive to VCs. On 1 April 2017, following consultations with representatives of the VC industry, the Act on Payment and Settlement and the Act on the Prevention of Transfer of Criminal Proceeds were amended to require operators of VC exchange businesses(1) (individually, VC exchange operators) to register with the JFSA.(2) As of 10 July 2018, 16 VC exchange operators were registered with the JFSA. This move was applauded for both encouraging the development of VCs while also strengthening consumer protections.

Upon the amendments to the Act on Payment and Settlement and the Act on the Prevention of Transfer of Criminal Proceeds coming into force, VC exchange operators became subject to certain regulatory and compliance-related obligations, including:

  • satisfying a prescribed minimum capital threshold requirement;(3)
  • performing customer identity verification checks;
  • establishing appropriate measures to prevent transactions with so-called 'anti-social forces';(4)
  • being accountable to customers, including ensuring that they are provided with sufficient information to make an informed decision regarding the services being offered by the VC exchange operator;
  • ensuring customer assets are segregated and identifiable;
  • maintaining appropriate books and records, including conducting annual audits on their financial statements;
  • ensuring appropriate oversight and controls are established with respect to third-party service providers;
  • establishing sufficiently robust internal compliance procedures and rules; and
  • conducting regular internal compliance audits.

Notably, the amendments reflect the JFSA's desire to implement a risk-based approach with respect to AML and CFT. Following the amendments, VC exchange operators must generally:

  • employ at least one qualified local compliance officer and internal controller sufficiently familiar with Japanese laws and regulations (although such positions may be held by a single individual); and
  • implement an appropriately robust AML/CFT regime based upon the VC exchange operator's assessment of its risk profile.

Regulatory concerns

Following the 2014 Financial Action Task Force (FATF) Plenary,(5) AML and CFT compliance among Japanese financial institutions, including VC exchange operators, has been a particular concern for the JFSA. This is expected to continue in the lead up to the next FATF peer review of Japan, which is scheduled for 2019. A critical report by the FATF regarding the security of the Japanese banking regime, including with respect to AML and CFT compliance, could result in penalties being imposed on the industry.

AML and CFT compliance by VC exchange operators

The AML and CFT compliance procedures of VC exchange operators have come under particular scrutiny by the JFSA due to:

  • the desire to address the regulatory concerns raised by the FATF in advance of the 2019 peer review;
  • the well-published concerns and criticisms of other regulators concerning the security of VC exchange operators generally; and
  • perhaps most importantly, the various issues recently identified by the JFSA with regard to various VC exchange operators.

As regards this last point, in early 2018 Coincheck, a VC exchange operator operating in Japan, was subject to a $530 million VC theft. This is one of the world's largest VC thefts to date and has reinvigorated the global debate on the vulnerabilities of VC exchange operators. Following its investigation into the theft, the JFSA announced that it would investigate all VC exchange operators in Japan to confirm that appropriate security policies and compliance procedures have been implemented.

On 22 June 2018 the JFTC, based on its examinations and on-site inspections, took a number of administrative actions – including the issuance of business improvement orders pursuant to the Payment Services Act – against six VC exchange operators, representing more than one-third of all VC exchange operators registered to operate in Japan. The administrative actions were based on the JFSA's conclusion that these operators had failed to establish an appropriate and effective management structure to ensure regulatory compliance, particularly with respect to AML and CFT procedures.(6) The named entities will be subject to continued close oversight by the JFSA until the identified internal control issues have been satisfactorily addressed.

Outlook for VC exchange operators in Japan

The fact that the JFSA identified material compliance failures by such a large proportion of VC exchange operators is cause for concern. With respect to AML and CFT compliance, the JFSA found that insufficient measures have been established to identify, prevent or protect customers from such risks. With the 2019 FATF peer review approaching, it is reasonable to expect the JFSA to continue to closely monitor all VC exchange operators to ensure that appropriate AMT and CFT procedures are established, which are consistent with global standards. Operators that fail to establish sufficient compliance regimes in a timely manner may be subject to increasingly severe penalties and repercussions. Similarly, while the JFSA is expected to continue to encourage the development of VCs, it is reasonable to conclude that the process to register and be licensed as a VC exchange operator will become more onerous and rigorous for applicants. Given the global interest in and concern over VCs, other regulators around the world are likely to closely monitor the situation in Japan – in particular, whether VC market participants are capable of complying with an increased level of scrutiny and regulatory obligations.

For further information on this topic please contact Peter Armstrong or Shu Sasaki at Nagashima Ohno & Tsunematsu by telephone (+81 3 6889 7000) or email ([email protected] or [email protected]). The Nagashima Ohno & Tsunematsu website can be accessed at


(1) A 'VC exchange business' is defined as any of the following carried out as a business:

  • the sale and purchase or trade of VCs;
  • intermediary, brokerage or agency services relating to the sale, purchase or trade of VCs;
  • the management of money or VCs on behalf of third parties in relation to the conduct described in the above points.

(2) Prior to the amendments to the acts, pursuant to a Cabinet decision of March 2014, VCs did not constitute a currency or a bond under Japanese law and, therefore, the sale, purchase and exchange of VCs were outside the scope of regulatory oversight.

(3) VC exchange operators must have a stated capital of at least Y10 million.

(4) Under Japanese practice, 'anti-social forces' broadly refer to groups or individuals that pursue economic benefits by violent, forceful or fraudulent means.

(5) At the 2014 plenary, the FATF issued a formal statement "calling on Japan to enact adequate anti-money laundering and counter terrorist financing legislation" (further information is available here).

(6) Further information is available here.