Although it is difficult to identify the true reason for the recent downward trend in the crypto market, some people say it is due to the upcoming regulations that will be discussed at the G20 this month (March 2018). That might be true. The Japan Financial Services Agency ("JFSA") claims itself as one of the first countries to introduce regulations around the crypto currencies. So, that means that everyone is interested to know what kind of regulations are currently implemented in Japan? May be. That is why I thought it might be a good idea to write about this topic.
- The regulations do not categorize crypto currencies as "Securities"
To start with the Japanese regulations do not categorize crypto currencies as "Securities" under the securities regulations. The securities regulations are governed under the Financial Instruments and Exchange Act ("FIEA"). The crypto currencies regulations were introduced by amending the "Fund Transfers Act" ("FTA") totally separate from the FIEA. FTA and FIEA are both supervised by the JFSA, so the JFSA is the primary responsible regulators for crypto currencies. By the way, it is not categorized as commodities. Therefore, the regulators responsible for crypto currencies is not the Ministry of Economy, Technology and Industry (METI).
- Crypto Currencies are defined as "Virtual Currencies (kaso tsuka)"
When amending the FTA, the legislators introduced a definition for Crypto Currencies. The definition under Paragraph 5 of Article 2 of the FTA stipulates as follows:
"In this Act "Virtual Currencies" means any of the following items.
(1) proprietary value (limited to those that are recorded by electronic means in electronic machines or other things, and excluding Japanese fiat currencies and non-Japanese fiat currencies and assets denominated in fiat currencies, the same in the immediately following item) that (a) can be used for payment of consideration for purchasing or borrowing merchandise or receiving services with unspecified number of people, and (b) can be purchased or sold with unspecified number of people as counter party, that can be transferred by using electronic data processing systems.
(2) proprietary value that can be exchanged with those defined in the immediately preceding item with unspecified number of people as counter party, that can be transferred by using electronic data processing systems."
Item (1) will be the likes of Bitcoin where it can be used in retails stores in Japan. Item (2) is something that is not quiet clear. The commentaries refer to anything that cannot be used in the open market to settle payment obligations for receiving merchandise or services, but is used to exchange the likes of Bitcoin.
This definition was drafted in light of the definition of Virtual Currencies in the FATF Guidance.
- The meat of the regulation is "Virtual Currency Exchange Business"
After defining "Virtual Currencies" the regulation moves on to define "Virtual Currency Exchange Business (kaso tsuka kokan gym)" ("VCEB"). This is because the FTA adopts a regime whereby anyone who wishes to operate a VCEB is required to obtain registration with the JFSA.
Now let me introduce you to the definition of VCBE. Paragraph 7 of Article 2 of the FTA stipulates are follows.
"In this Act "Virtual Currency Business Operator" means to engage in any of the following activities as a business, and "Exchange Etc. of Virtual Currency" means to engage in the acts set forth in items (1) or (2).
(1) Sale and purchase of Virtual Currencies or exchange with other Virtual Currencies
(2) Intermediary, brokerage or agency of any of the acts stipulated in the immediately preceding item
(3) Management of cash or Virtual Currencies of users of the services set forth in the immediately preceding two items"
This definition of VCEB captured all of the exchanges active in Japan. Thus, the exchanges were required to obtain registration from the JFSA. This regulation was enacted in April of 2017, the active exchanges were entitled to a special transitional treatment whereby they could continue to operate without obtaining the registration. Those VCEBs filed for a registration but some of them were put on hold by the JFSA. Coincheck that caused the NEM (XEM) disaster was one of those VCEBs that was unable to obtain the registration.
Tomorrow we will look into the requirements for obtaining the VCEB registration and what is practically happening in Japan, including the existence of a whitelist that is rumored in the Japanese crypto space. This might give a hint of what might happen elsewhere after the regulations tighten up.
Thank you for reading and please let me know if you have any topic that you would like to know.