Cryptoassets for investment and financing

Regulatory threshold

What attributes do the regulators consider in determining whether a cryptoasset is subject to regulation under the laws in your jurisdiction?

The attributes applicable to a cryptoasset are as defined under Article 2-5 of the Payment Services Act (Act 59/2009, as amended) (PSA). 

Investor classification

How are investors in cryptoassets classified and treated differently?

With respect to investors in cryptoassets generally, whether by initial coin offering (ICO) or via a cryptoasset exchange, there is no particular regulation which delineates rights or protections by reference to type of investor.

For purposes of a securities token offering, the Financial Instruments and Exchange Act (Act 25/1948) (FIEA) classifies investors into the following categories:

  • general investors;
  • specified Investor – professional investors with experience investing in securities and who understand the conventional risks of securities investment;
  • qualified institutional investors (QIIs) – enumerated categories of professional investor such as bank and insurers; and
  • for the purposes of the Article 63 exemption available for a self-offering of Type 2 securities – non-QII investors equipped with the judgment to make investments and operators who have close relationships with fund operators. Eligible non-QII investors are:
    • fund managing firms;
    • central and local governments;
    • listed companies and their subsidiaries and affiliates;
    • officers, employees and subsidiaries of fund managers;
    • private companies with assets of over Y50 million;
    • individual investors with at least Y100 million of investment-oriented financial assets; and
    • employees' pension funds and corporate pension funds with at least Y10 billion of investment-oriented financial assets.
Initial coin offerings

What rules and restrictions govern the conduct of, and investment in, initial coin offerings (ICOs)?

The PSA is applicable to any ICO (other than a securities token offering (STO) under the amendments to the Financial Instruments and Exchange Act (Act 25/1948) (FIEA) where the tokens fall within the PSA definition of cryptoassets. The prevailing view is that tokens will be considered to be a cryptoasset if there is an existing market for the tokens, demonstrated by transactions in the tokens being conducted on Japanese or foreign cryptoasset exchanges. The tokens may also be deemed to be cryptoassets even if there is no existing market for the tokens if they are not subject to significant transfer restrictions on the exchange for Japanese or foreign fiat currencies or with other cryptoassets.

The rules and guidelines of the Japanese Virtual Currency Exchange Association also apply to ICOs and include the following requirements:

 

  • due diligence on the financial condition of issuers and the eligibility and feasibility of the underlying project;
  • disclosure requirements, including an explanation of the features of the tokens, the issuer and the purpose of use of the funds;
  • internal structures to mitigate against conflicts of interest and to ensure the segregation of teams conducting due diligence on an issuer from sales teams, as well as functions to evaluate conflicts of interest that may arise during the sale process;
  • ongoing monitoring of issuers;
  • measures to discontinue a token sale when customer protection measures are inadequate, including appropriate provisions for this purpose contained in the distribution agreement; and
  • notification to the FSA.
Security token offerings

What rules and restrictions govern the conduct of, and investment in, security token offerings (STOs)?

The previous version of the PSA did not clarify the treatment of STOs and the extent, if any, to which Japanese securities regulation might apply. The FSA tried to remedy this by announcing, on 27 October 2017, that ICOs “may fall within the scope of the PSA and/or the FIEA depending on how they are structured” and “if an ICO has the characteristics of an investment and the purchase of a token by a virtual currency is practically deemed equivalent of that by a legal tender, the ICO becomes subject to the regulations under the FIEA”.

The position has now been clarified under the PSA amendments and the FIEA amendments, with the result that the offering and trading of STOs will be exclusively subject to FIEA regulation applicable to securities.

The new requirement will apply whenever the tokens in question represent rights (transferable through electronic means and recordable in electronic devices) to share in the profits and losses of an underlying business or project, irrespective of whether the investment is funded by cryptocurrency or fiat currency (electronically recorded transferable rights (ERTRs)). The ERTRs will be deemed to represent “interests in a collective investment scheme that are represented by tokens”. However, due to the highly liquid nature of ERTRs, the FIEA amendments distinguish them from other Type 2 securities, such as interests in traditional, non-digital, collective investment schemes, and instead categorise them as Type 1 securities on par with stocks and bonds.

A Type 1 financial instruments business operator licence is required to conduct the solicitation of STOs, while a Type 2 financial instruments business operator licence is required for a self-offering by the issuer.

A Type 1 offering requires compliance with onerous disclosure requirements such as the filing of a securities registration statement and ongoing semi-annual securities reports unless the offering is structured as a private placement. The private placement exemption to a Type 1 offering requires that:

  • the offering be made only to QIIs or less than 50 non-QIIs with resale restrictions embedded in the token smart contract; and
  • access to the offering materials is available only through a restricted or password-protected site in order to ensure compliance with the limitations on the solicitation of non-QIIs.

An exemption is also available for a Type 2 self-offering – the so-called ‘Article 63 exemption’, which is available where there is at least one QII investor and no more than 49 eligible non-QII investors (eligibility being limited to certain sophisticated investors such as listed companies and individuals holding a securities portfolio of at least Y100 million). This exemption does not permit the participation of general investors. Additionally, if the issuer actually manages the investment of the funds collected from investors, it also needs to be licensed as an investment manager under the FIEA.

Matters relating to STOs will also be subject to the rules and regulations of the certified self-regulatory organisation.

Stablecoins

What rules and restrictions govern the issue of, and investment in, stablecoins?

The FSA has taken the view that, in principle, stablecoins pegged to fiat currencies do not fall into the category of cryptoassets under the PSA.

Under current regulation, the interpretation of the legal status of stablecoins may differ depending on their precise attributes. They could, for example, be regarded as prepaid payment instruments (PPIs) under the PSA if they have the following features:

  • the proprietary value is recorded (record of value);
  • they are issued for a price (issuance in exchange for consideration); and
  • they are used for payment for or the receipt of goods or services (use as payment or demand). 

 

This may be problematic as it is prohibited under the PSA to redeem the value issued under a PPI. Alternatively, a payment feature associated with a stablecoin could lead it to be regarded as the transfer of funds. Both PPI issuance and funds transfer services require registration under the PSA. Stablecoins may also be regarded as currency denominated assets.

The status of stablecoins, such as Facebook`s libra, is currently under review by a study group comprised of the FSA, the Bank of Japan and the Finance Ministry of Japan.

Airdrops

Are cryptoassets distributed by airdrop treated differently than other types of offering mechanisms?

Provided that a cryptoasset is distributed for zero consideration, the distribution is generally not regulated as an ICO under the PSA.

Advertising and marketing

What laws and regulations govern the advertising and marketing of cryptoassets used for investment and financing?

The PSA amendments includes restrictions on advertising and solicitation by cryptoasset exchanges, including the prohibition of false representations and exaggerated advertising, as well as the prohibition of advertisements and solicitation that encourage speculation. In the case of internet-based solicitation, the FSA has indicated that this requirement would be satisfied by a mechanism whereby the customer clicks to acknowledge that they have read and understood the explanation. Where the sales proceeds of the cryptoassets are to be used for services or applied to the operation of a business operated by the issuer, or where the price is linked to underlying assets, investor explanations must include a rational explanation of the basis for the sales price.

Additionally, under the rules of the Japanese Virtual Currency Exchange Association, investors must be provided with a clear and adequate explanation of the cryptoassets commensurate with the knowledge and experience of the investor and a record of such explanation must be retained.

Trading restrictions

Are investors in an ICO/STO/stablecoin subject to any restrictions on their trading after the initial offering?

In principle, investors may not trade cryptoassets with anyone other than a registered crypto exchange. Similarly, investors may not trade security tokens designated as electronically recorded transferable rights (ERTRs)with anyone other than a Type 1 financial instruments business operator or on a proprietary trading system.

Crowdfunding

How are crowdfunding and cryptoasset offerings treated differently under the law?

A crowdfunding offering soliciting investment in equity stocks is exempt from a registration statement filing under the FIEA provided that the amount of the solicitation does not exceed Y100 million. The FIEA offers a small amount electronic solicitation service provider licence for equity-based crowdfunding platformers, which relaxes the regulations that would otherwise apply to a Type 1 financial instruments business operator.

Under the FIEA amendments, a similar regulation will apply to security tokens designated as electronically recorded transferable rights (ERTRs), such that an issuer of ERTRs may offer them through an equity-based crowdfunding platform pursuant to a small amount electronic solicitation service provider  licence up to the amount of Y100 million without filing a registration statement.

Transfer agents and share registrars

What laws and regulations govern cryptoasset transfer agents and share registrars?

In principle, a transfer of cryptoassets must be made exclusively through a cryptoasset exchange (except in the case of an STO). The cryptoasset exchanges (or a Type 1 or Type 2 financial instruments business operator in the case of an STO) are subject to requirements to maintain accurate books and records under the PSA amendments and the FIEA amendments, as well as the rules of the respective self-regulatory organisations.

Anti-money laundering and know-your-customer compliance

What anti-money laundering (AML) and know-your-customer (KYC) requirements and guidelines apply to the offering of cryptoassets?

Both a cryptoasset exchange registered under the PSA and a Type 1 or Type 2 financial instruments business operator under the FIEA are defined as a `specified business operator` subject to the requirements of the Act on Prevention of the Transfer of Criminal Proceeds (Act 22/2007). Those requirements include:

 

  • know-your-customer checks upon the opening of an account. In addition to identity verification, these requirements currently include a declaration of beneficial ownership in the case of corporate customers and the dispatch of a non-forwardable registered letter to the customer’s address;
  • reporting suspicious transactions to the Japan Financial Intelligence Centre and the Japan Financial Intelligence Unit;
  • record production and retention requirements; and
  • PEP monitoring.
Sanctions and Financial Action Task Force compliance

What laws and regulations apply in the context of cryptoassets to enforce government sanctions, anti-terrorism financing principles, and Financial Action Task Force (FATF) standards?

With respect to sanctions, these are overseen by the Ministry of Finance, which has jurisdiction under the Foreign Exchange and Foreign Trade Act (Act 228/1949), the key legislation for sanctions, export-import and funds controls, as well as the freezing of assets. The main sanctions that regulated entities are required to screen for are those named on a list published by the Ministry of Finance, which largely reflects the terrorist and other entities on the United Nations Security Council Consolidated List. Japan also issues autonomous sanctions, largely relating to North Korea.

Law stated date

Correct on

Give the date on which the above content is accurate.

22 November 2019.