Currently, virtual currency exchange businesses are regulated by the Payment Services Act. Virtual currency exchange business operators must be registered with a competent local finance bureau. A bill to amend the Payment Services Act and other acts that was submitted in March 2019 would change the name of virtual currency to “crypto assets,” require cold wallet for storage of cryptoassets, recognize and regulate cryptoasset custodian businesses, and regulate ICOs.
I. Definition of Virtual Currency
The Payment Services Act defines “virtual currency” as
- property value that can be used as payment for the purchase or rental of goods or provision of services by unspecified persons, that can be purchased from or sold to unspecified persons, and that is transferable via an electronic data processing system; or
- property value that can be mutually exchangeable for the above property value with unspecified persons and is transferable via an electronic data processing system.
The Act also states that virtual currency is limited to property values that are stored electronically on electronic devices; currency and currency-denominated assets are excluded.
II. Regulation of Virtual Currency Exchange Businesses
Under the Payment Services Act, only business operators registered with a competent local finance bureau are allowed to operate a virtual currency exchange business. The operator must be a stock company or a “foreign virtual currency exchange business” that is a company with a representative who is resident in Japan and an office in Japan. A “foreign virtual currency exchange business” means a virtual currency exchange service provider that is registered with a foreign government in the foreign country under a law that provides an equivalent registration system to the system under the Japanese Payment Services Act.
The Act requires virtual currency exchanges businesses to establish security systems to protect the business information they hold. When such a business entrusts part of its operations to a contractor, it must take measures to ensure that business is appropriately conducted. Virtual currency exchange businesses must separately manage customers’ money or virtual currency apart from their own. The state of such management must be reviewed by certified public accountants or accounting firms.
Virtual currency exchange businesses must keep accounting records of virtual currency transactions and submit annual reports to the Financial Services Agency (FSA). The FSA is authorized to order exchange businesses to submit reports and reference materials and to dispatch its officials to inspect the offices of an exchange business where necessary to ensure proper conduct. The FSA may issue orders to such businesses to improve their practices, rescind registration of a virtual currency exchange business, or suspend its business for up to six months in certain cases.
III. Pending Bill to Amend the Payment Services Act
The bill would require cryptoasset exchange businesses to manage customers’ cryptoassets, except for the part that is necessary for running the business, using reliable methods that would be described in a Cabinet order, such as a “cold wallet” that is disconnected from the internet. Cryptoasset exchange businesses would be required to maintain a holding of cryptoassets (guarantee cryptoassets) that are the same kind as customers’ cryptoassets in an amount equivalent to the customers’ cryptoassets that are not stored in cold wallet. Such guarantee cryptoassets must be stored separately from their other cryptoassets.
The bill would add businesses that only manage cryptoassets (custodian businesses) to cryptoasset exchange businesses under the Payment Services Act. Therefore, cryptoasset custodian businesses would be registered in the same way as crypto currency exchange businesses, and would be obligated to confirm the identity of owners and store customers’ assets separately from their own.
The bill would obligate cryptoasset exchange businesses to report changes to the cryptoassets that they deal with, in advance, to the FSA. This is to screen problematic cryptoassets for which trading records are not disclosed and, therefore, which can be used for money laundering.
The bill also amends the Financial Instruments and Exchange Act. The amendment would add cryptoassets to a category of financial instruments. Therefore, cryptocurrency sales would be subject to regulation under the Act. Cryptoasset margin transactions, which are currently not regulated, would be limited to leverage up to 25 times more than traders’ deposits, the same as forex leverage.
IV. Anti-Money Laundering Regulation
The Act on Prevention of Transfer of Criminal Proceeds subjects virtual currency exchange businesses to the requirements under the anti-money laundering regulations. Virtual currency exchange businesses are therefore obligated to check the identities of customers who open accounts, keep transaction records, and notify authorities when a suspicious transaction is identified.
V. ICO Regulation
To date, it has not been clear what existing regulations are applicable to initial coin offerings (ICOs). The proposed amendments to the Financial Instruments and Exchange Act would clarify that the Act is applicable to the issuance of tokens in exchange for cryptoassets. ICOs would be subject to similar regulations to stock issue, such as disclosure of information.
The National Tax Agency (NTA) treats the profit earned from sales of virtual currency, in principle, as miscellaneous income, rather than capital gains, under the Income Tax Act. Miscellaneous income is added to the amount of other income, excluding specified capital gains, when a person’s taxable income is calculated and taxed.
Prepared by Sayuri Umeda
Senior Foreign Law Specialist
 In Japanese, the term 仮想通貨 (“virtual currency”) is used.
 資金決済に関する法律 [Payment Services Act], Act No. 59 of 2009, amended by Act No. 62 of 2016, art. 2, para. 5.
 金融商品取引法 [Financial Instruments and Exchange Act], Act No. 25 of 1948, amended by Act No. 46 of 2017, art. 2, para. 1, http://www.japaneselawtranslation.go.jp/law/detail/?printID=&id=3186&re=&vm=02, archived at https://perma.cc/LK7Y-BXTH.
 金融商品取引業等に関する内閣府令 [Cabinet Office Order on Financial Instruments Business, etc.], Cabinet Office Order No. 52 of 2007, amended by Cabinet Office Order No. 55 of 2017, http://www.japaneselawtranslation.go.jp/law/detail/?printID=&ft=2&re=02&dn=1&yo=Financial+Business+Instruments&ia=03&ph=&x=43&y=11&ky=&page=1&vm=02, archived at https://perma.cc/H6JA-Q7EK.
 Id. arts. 63-2 & 63-3. Because the Cabinet delegates its authority over most of the matters under the Payment Services Act to the Financial Services Agency (FSA) (id. art. 104), the FSA is the regulatory agency that handles virtual currency transactions. See also Details of Screening for New Registration Application as Virtual Currency Exchange Service Provider, FSA, http://www.fsa.go.jp/en/news/2017/20170930-1/02.pdf (last visited Apr. 30, 2018), archived at https://perma.cc/BVU7-PGSW.
 Payment Services Act, art. 63-5, para. 1.
 Id. art. 2, para. 9.
 Id. art. 63-8.
 Id. art. 63-9.
 Id. art. 63-11.
 Id. art. 63-13.
 Id. art. 63-14.
 Id. art. 63-15.
 Id. art. 63-16.
 Id. art. 63-17.
 Cabinet Bill No. 49 of 198th Diet Session, http://www.shugiin.go.jp/internet/itdb_gian.nsf/html/gian/ honbun/houan/g19809049.htm (in Japanese), archived at https://perma.cc/32MU-VJ2V.
 Payment Services Act, as amended by Cabinet Bill No. 49 of 198th Diet Session (hereinafter “Proposed Payment Services Act”), art. 1 & art. 2, item 5.
 Proposed Payment Services Act, art. 63-11, para. 2.
 FSA,「情報通信技術の進展に伴う金融取引の多様化に対応するための資金決済に関する法律等の一部を改正する法律案」説明資料 (Explanatory Material of “Bill to Amend Part of Payment Services Act, etc. in Order to Adjust to Diversified Financial Transactions by Development of Information Communication Technologies”) 2 (Mar. 2019) (hereinafter “Explanatory Material”), https://www.fsa.go.jp/common/diet/198/02/setsumei.pdf, archived at https://perma.cc/DH48-E3PH.
 Proposed Payment Services Act, art. 63-11-2.
 Id. art. 2, item 7.
 Explanatory Material, supra note 20, at 2.
 Proposed Payment Services Act, art. 63-3, para. 1, item 7 & art. 63-6, para. 1.
 Explanatory Material, supra note 20, at 3.
 Financial Instruments and Exchange Act, as amended by Cabinet Bill No. 49 of 198th Diet Session (hereinafter “Proposed Financial Instruments and Exchange Act”), art. 2, para. 24.
 Explanatory Material, supra note 20, at 4.
 犯罪による収益の移転防止に関する法律 [Act on Prevention of Transfer of Criminal Proceeds], Act No. 22 of 2007, amended by Act No. 67 of 2017, art. 2, para. 2, item 31.
 Id. arts. 4, 7–8.
 Explanatory Material, supra note 20, at 4. See also Taro Awataguchi, Japan, in Blockchain and Cryptocurrency Regulation 2019 (Global Legal Insights, Jan. 2019), https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/japan, archived at https://perma.cc/6VVF-YAT9.
 Proposed Financial Instruments and Exchange Act, art. 2, paras. 3 & 8, art. 3 & art. 28. See also Explanatory Material, supra note 20, at 4.
 Explanatory Material, supra note 20, at 4.
 所得税法 [Income Tax Act], Act No. 33 of 1965, amended by Act No. 74 of 2017, art. 35.
 Id. art. 33.
 NTA, 仮想通貨に関する所得の計算方法等について（情報）[Regarding Calculation Method of Income Relating to Virtual currency (Information), Individual Taxation Information], No. 4 (Dec. 1, 2017), http://www.nta. go.jp/law/joho-zeikaishaku/shotoku/shinkoku/171127/01.pdf, archived at https://perma.cc/M22N-53MF.
 租税特別措置法 [Act on Special Measures concerning Taxation], Act No. 26 of 1957, amended by Act No. 4 of 2017, arts. 8 through 8-5.
 Income Tax Act, art. 89.
Last Updated: 06/11/2019