Having one of the most advanced regulatory environments for cryptocurrencies, Japan recognizes Bitcoin and other virtual assets as legitimate property under the Payment Services Act (PSA). Crypto exchanges in Japan are obliged to register and follow traditional Anti Money Laundering/Combating the Financing of Terrorism (AML/CFT) responsibilities as a result of this legislation. The National Tax Agency determined in December 2017 that earnings on cryptocurrencies should be classified as "miscellaneous income," and purchasers should be compensated accordingly.
Amendments to the PSA and the Financial Instruments and Exchange Act (FIEA), which took action in May 2020, are among the most up-to-date rules. The revisions change the term "virtual currency" to "crypto-asset," increase limits on managing users' virtual money and tighten regulations on crypto derivatives trading. According to the new laws, cryptocurrency custody service providers (those who do not sell or buy crypto assets) are covered by the PSA, while cryptocurrency derivatives companies are covered by the FIEA.
The Act on Prevention of Transfer of Criminal Proceeds (APTCP) establishes AML standards for crypto assets, which are implemented by Japan's financial intelligence unit (FIU), the Japan Financial Intelligence Center (JAFIC).
VASPs that provide exchange services are required by the APTCP to undertake strict KYC (Know-Your-Customer) checks and keep track of questionable transactions.
These include;
- Ascertaining the nature of performing transactions by verifying the identification data of customers (KYC), as well as an individual who retains substantial control over the client in question's business.
- Maintain verification and transaction records by creating, keeping, and updating them.
- Keep the records for at least seven years.
- Any suspicious transaction must be reported to the appropriate authority (and any transaction above 30 million JPY (209,000 GBP), in crypto or fiat, must be notified to the Ministry of Finance following the Foreign Exchange and Foreign Trade Act).
Cryptocurrency Exchange Regulations
Japan's crypto exchange regulations are developing. Only companies with a highly qualified Financial Bureau are permitted to exist as cryptocurrency exchanges under the PSA, but international cryptocurrency exchanges are permitted to work if they can prove an equivalent registration standard in their host country, in maintaining Japan's progressive attitude.
While exchanges are allowed in Japan, crypto laws have become a national priority after a succession of high-profile breaches, including the $530 million digital currency robbery known as the Coin check heist. The Financial Services Agency (FSA) of Japan has increased its efforts to enforce trading and exchanges. Amendments to the PSA now necessitate cryptocurrency trading to sign up with the FSA in order to operate – a process that can take up to six months and enforces stricter cybersecurity and AML/CFT requirements. Exchange-based rules in Japan are largely geared at safeguarding market integrity, and users, investors, and exchanges must adhere to specific record-keeping standards and submit an annual report to the Financial Services Agency (FSA). Following revisions in 2016 and 2019, this requirement was expanded to incorporate client identity checks and to include custodial services providers.
Changes in Cryptocurrency Rules in Japan
In October 2018, the Financial Action Task Force (FATF) updated its recommendations. Crypto asset exchangers, custodians of crypto assets, and others will be obliged to adopt anti-money laundering and counter-terrorism funding measures as a result of the changes. On May 1, 2020, amendments to the Payment Service Act were enacted, considering such FATF guidelines.
The following are the major components of the Payment Service Act changes.
Because most crypto assets are not used as currencies, cryptocurrencies are being referred to as "crypto-assets" rather than "virtual currencies," and commercials for "speculative investments" in the crypto world are being restricted. Provisions concerning in-advance alerts, etc., have been imposed, which relate to applications for enrolment of a crypto asset exchanger.
The strategy for advertising online of crypto assets exchangers, forbidden actions, provision of information to users and other precautions for ensuring user security, and techniques for handling users' monetary and crypto assets have all been prescribed as provisions concerning the service of crypto assets exchanges.
For Financial Instruments Service Operators, they include the creation of business management systems, techniques for showing ads, providing information to consumers, banned activities, and methods for controlling rights to transmit electronic data of customers, among other things.
While the Payment Service Act changes are not directly connected to taxes, it is hoped that new tax laws for cryptocurrencies would be enacted. Individual earnings from the sale of crypto assets, for example, are now taxed at standard individual tax rates; if more favorable rates were adopted, this might encourage further growth in the field and promote Japan as a digital asset "hub" in Asia.
