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), as well as 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, as well as 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) will be brought within the purview of the PSA under the PSA amendments, and any such custody services will be an activity that requires registration as a cryptoasset exchange.

New requirements for the safe keeping of cryptoassets held in custody by a cryptoasset exchange include the following:

  • customer cryptoassets must be 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.

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

Broker-dealers

How are cryptoasset broker-dealers regulated?

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

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

  • expanded grounds for the rejection by the FSA of an application for registration as a cryptoasset exchange;
  • a new requirement for advance notice to the FSA of any amendment to prescribed matters pertinent to a particular cryptoasset;
  • new regulations with respect to 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 with respect to cryptoassets in the event of the insolvency of the cryptoasset exchange.

Additionally, under the FIEA amendments, the following acts are expressly prohibited with respect to 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 due to the difficulty of identifying the relevant facts.

 

Decentralised exchanges

What is the legal status of decentralised cryptoasset exchanges?

A decentralised cryptoasset exchange is subject to licensing requirements under the PSA, as well as 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 which facilitates the trading of cryptoassets. Both the PSA and the FIEA regulate any intermediary activity that facilitates users to trade cryptoassets and security tokens designated as electronically recorded transferable rights (ERTRs).

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 services 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

Trading 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 the FIEA with respect to the sale, purchase or exchange of cryptoassets, or the intermediation thereof, in Japan or regarding customers resident in Japan. In addition, 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 such 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.

With respect to 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. Such measures include:

  • disclaimers in the Japanese language 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. In the event that 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 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 citizen of Japan 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% to 55% 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 Y10 billion ($93 million) and that a major investigation was to be carried out to identify delinquent companies and individuals.

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22 November 2019.