T Skevington and M Bacina
Japan digital currency regulations to commence in May
From 1 May 2020, Japan will start enforcing the amended legislation passed in 2019 to regulate digital assets.
Passed in June 2019, the Payment Services Act and Financial Instruments and Exchange Act were meant to come into effect from April 2020, but were been delayed.
Apart from numerous minor changes, including changes in terminology like removing the use of "virtual currency" in favour of "crypto asset", the key changes are summarised below.
Payment Services Act (PSA)
Crypto asset custodians need to be registered with Japan's financial services regulator, the aptly named Financial Services Agency (FSA);
Crypto exchanges must manage user funds in a way much closer to traditional financial services, by keeping user funds entirely separate from exchange business cash flows. Generally this will require obtaining a trust account operated by a third party - which raises the interesting question of whether there are willing trust account operators who can provide this service;
Exchanges are also required to use "reliable methods" to store user funds, and where they cannot do so (i.e. the exchange stores user funds in hot wallets), the exchange must maintain the “the same kind and the same quantities of crypto assets” as the users’ crypto assets.
Financial Instruments and Exchange Act (FIEA)
The key change to the FIEA is the introduction of the concept of "electronically recorded transferable rights" (ERTRs), separate to the "crypto asset" definition included in the PSA, to encompass crypto assets issued as part of an ICO or STO. The FIEA has also been amended to encompass crypto derivative transactions.
The overall market consensus seems to be that the changes are broadly positive, and are a step in the right direction to encourage more digital asset and blockchain activity in Japan. This is in keeping with Japan's long history of embracing blockchain, with Bitcoin recognised as legal tender and being home to the infamous Mt Gox at one point handling more bitcoin transactions than any other exchange.