Cryptoasset trading

Fiat currency transactions

What rules and restrictions govern the exchange of fiat currency and cryptoassets?

The exchange of fiat currency and cryptoassets must take place via a cryptoasset exchange. Cryptoasset exchanges are subject to licensing requirements under the Payment Services Act (Act 59/2009, as amended) (PSA), and the rules of the relevant self-regulatory organisation.

Exchanges and secondary markets

Where are investors allowed to trade cryptoassets? How are exchanges, alternative trading systems and secondary markets for cryptoassets regulated?

The trading of cryptoassets must take place via a cryptoasset exchange. Cryptoasset exchanges are subject to licensing requirements under the PSA, and the rules of the relevant self-regulatory organisation.

Custody

How are cryptoasset custodians regulated?

Custody services for cryptoassets (ie, the holding or management of cryptoassets as a separate service from the sale, purchase or exchange of cryptoassets or the intermediation thereof), which were previously unregulated, have been brought within the purview of the PSA under the PSA amendments, and any of these custody services are now an activity that requires registration as a cryptoasset exchange.

Cryptoasset exchange service providers offering custody services will also be required to maintain net assets of not less than the aggregate value of the cryptoassets held in customer hot wallets.

Requirements for the safekeeping of cryptoassets held in custody by a cryptoasset exchange include:

  • customer cryptoassets must be segregated from the service provider’s own cryptoassets and held in offline cold wallets or similar methods, exclusive of the portion necessary to satisfy daily customer demand;
  • where customer cryptoassets are not maintained in a cold wallet, the cryptoasset exchange itself must hold own-account cryptoassets of the same type and quantity as the corresponding customer cryptoassets in a segregated cold wallet; and
  • the portion of crypto assets that can be held in a hot wallet must be 5 per cent or less of the aggregate value of the customer cryptoassets held in custody.

 

The PSA amendments also introduce a structure whereby customers are entitled to receive preferential payment concerning cryptoassets in the event of the insolvency of the cryptoasset exchange.

Any customer cash held by a cryptoasset exchange service provider must also be segregated from its own cash and maintained in a trust account opened with a licensed trustee, with the service provider’s customers designated as beneficiaries and a daily reconciliation against actual daily cash balances required.

An annual audit concerning the administration of customer assets is required and a contingency plan must be adopted for scenarios under which cryptoassets cannot be delivered to customers under customer contracts.

It is worth noting in connection with the implementation of the PSA Guidelines, that the Financial Services Agency (FSA) has made statements to the effect that a multi-signature access system, where the service provider and its affiliates do not together hold or control all the necessary access keys and the customer retains essential pieces of the key, may not be deemed to be custody services such as to trigger a registration obligation under the PSA.

Broker-dealers

How are cryptoasset broker-dealers regulated?

Cryptoasset exchanges, or Type 1 or Type 2 financial instruments business operators in the case of securities token offerings, are subject to licensing requirements under the PSA and the Financial Instruments and Exchange Act (Act 25/1948) (FIEA), respectively, and the rules of the respective self-regulatory organisations.

Also, the PSA amendments introduce new provisions intended to strengthen the regulatory regime applicable to cryptoasset exchanges, namely:

  • expanded grounds for FSA rejection of a cryptoasset exchange registration application;
  • a requirement to disclose the names of holders of 10 per cent or more of the voting rights in the applicant;
  • a requirement to have a minimum stated capital of at least ¥10 million and a positive amount of total net assets;
  • a requirement for advance notice to the FSA of any amendment to prescribed matters pertinent to a particular cryptoasset;
  • requirements for best execution similar to those applicable to securities under FIEA;
  • prohibition of front-running;
  • regulations concerning advertising and solicitation of cryptoasset exchange services; and
  • custody related requirements.

 

The PSA amendments also introduce a structure whereby customers are entitled to receive preferential payment concerning cryptoassets in the event of the insolvency of the cryptoasset exchange.

Cryptoasset derivative contracts that are to be settled by the delivery of cryptoassets (instead of cash) are now regulated under FIEA rather than the PSA. However, if customer cryptoassets are held in custody in connection with cryptoasset derivatives services, the services may also be deemed to be cryptoasset custody services, requiring the concurrent registration as a cryptoasset exchange service provider.

Additionally, under the FIEA amendments, the following acts are expressly prohibited concerning spot and derivative cryptoasset transactions:

  • wrongful acts;
  • the dissemination of rumours, fraudulent behaviour, assault or intimidation; and
  • market manipulation.

 

Insider trading is not currently regulated under the FIEA amendments owing to the difficulty of identifying the relevant facts.

Concerning margin trading, the PSA amendments have introduced rules that are stricter than those applicable to foreign exchange dealers under FIEA. These rules include disclosure requirements as to transaction terms and risks and loss cut thresholds. 

Additionally, from 1 May 2021, cryptoasset exchange service providers will be subject to a requirement to require customers conducting derivative transactions on margin to lodge a security deposit of not less than 50 per cent of the value of the trade in the case of individuals, or in the case of corporate customers, a percentage to be prescribed by the FSA.

Decentralised exchanges

What is the legal status of decentralised cryptoasset exchanges?

A decentralised cryptoasset exchange is subject to licensing requirements under the PSA, and the rules of the relevant self-regulatory organisation.

The basic idea for the decentralised cryptoasset exchange being regulated accordingly is that, regardless of whether there is a central authority which exclusively processes the exchange transactions, there must be a party that provides users both an interface that facilitates the trading of cryptoassets. Both the PSA and FIEA regulate any intermediary activity that facilitates users to trade cryptoassets and security tokens designated as electronically recorded transferable rights.

Peer-to-peer exchanges

What is the legal status of peer-to-peer (person-to-person) transfers of cryptoassets?

Under the definition of a cryptoasset exchange service under the PSA, the transfer of cryptoassets by way of business would trigger a licensing requirement under article 2-7 of the PSA. The concept of ‘by way of business’ has not been defined and it is possible that even a peer-to-peer transaction could be deemed to be ‘by way of business’, particularly if transactions are repeated. Peer-to-peer transactions are therefore at risk of being deemed to infringe the PSA.

Trading with anonymous parties

Does the law permit trading cryptoassets with anonymous parties?

The trading of cryptoassets must take place via a cryptoasset exchange. Cryptoasset exchanges are subject to the Act on Prevention of the Transfer of Criminal Proceeds (Act 22/2007). Any account holder with a cryptoasset exchange is subject to know-your-customer processes; therefore, it is not feasible to trade cryptoassets among anonymous parties.

Foreign exchanges

Are foreign cryptocurrency exchanges subject to your jurisdiction’s laws and regulations governing cryptoasset exchanges?

A foreign cryptocurrency exchange is subject to the provisions of the PSA and FIEA concerning the sale, purchase or exchange of cryptoassets, or the intermediation thereof, in Japan or regarding customers resident in Japan. Also, article 63-22 of the PSA expressly states that a foreign cryptocurrency exchange that is not registered as a cryptoasset exchange under the PSA may not engage in solicitation directed towards persons in Japan for transactions relating to cryptoassets. 

Any determination that these activities are or are not cryptoasset exchange services requiring registration as a cryptoasset exchange depends on all the facts and the precise nature of the activity in question.

Concerning internet-based advertising by foreign cryptocurrency exchanges, the FSA has issued guidance to the effect that online advertising by a foreign cryptocurrency exchange raises a presumption that the exchange is engaging in solicitation towards Japanese residents unless reasonable measures are taken to prevent the firm from providing services to Japanese residents. These measures include:

  • disclaimers in Japanese that are readily visible to a Japanese resident on the site’s landing page;
  • measures to prevent the acceptance of orders from investors in Japan, such as vetting communications from investors to exclude residential or email addresses located in Japan; and
  • refraining from establishing physical facilities in Japan. If an offending website comes to the attention of the FSA, the service provider will be listed on the FSA’s blacklist, which will be published on the FSA’s website.

 

The blacklist is readily reviewed by the financial authorities of other jurisdictions. In some cases, this results in offenders being scrutinised by their home-country authorities.

Under what circumstances may a citizen of your jurisdiction lawfully exchange cryptoassets on a foreign exchange?

No restrictions apply to a Japanese citizen transacting cryptoassets on a foreign exchange; however, solicitation of a Japanese resident in Japan by any person not registered as a cryptoasset exchange is a breach of the PSA.

Taxes

Do any tax liabilities arise in the exchange of cryptoassets (for both other cryptoassets and fiat currencies)?

The sale of cryptocurrency is generally subject to consumption tax where the seller is located in Japan; however, under an amendment introduced in 2017, there is an exemption for the sale of cryptocurrencies that constitute cryptoassets under the PSA.

Further, the National Tax Agency takes the position that gains generated by the sale or use of cryptoassets are to be treated as miscellaneous income (and taxed at rates of 15 per cent to 55 per cent in cases where the taxpayer is unable to offset losses incurred elsewhere against the gains generated by the sale or use of the cryptoasset).

Additionally, cryptoassets held in the estate of a deceased person will be subject to inheritance tax.

In August 2019, the Japanese tax authorities announced that crypto-related businesses and individuals have failed to report crypto gains valued at ¥10 billion (US$93 million) and that a major investigation is to be carried out to identify delinquent companies and individuals.

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2 November 2020.