Amendments are made in two cryptocurrency-related laws, ‘the Payment Services Act’ and ‘the Financial Instruments and Exchange Act’, which will come into effect in April 2020.
Most Japanese crypto exchanges have welcomed the changes since they expect more institutional investors to join the crypto industry. However, others voiced their concerns that the changes may bring some uncertainty to custodians and wallet service providers.
Let’s get deep into these Laws to get it easily.
The new law revises the term “Virtual Currency” and says that “Crypto Asset” would be a better term to describe cryptocurrency.
The ‘yen’, ‘dollar’ and other currencies have the backing of governments or central banks. Crypto-assets have no specific issuers or official guarantee of value and their prices violently fluctuate. It is difficult to use them as a means of payment. It is also an appropriate decision to distinguish between crypto-assets and currencies. The change was made since “crypto assets” is used more frequently at international meetings, such as the G-20.
The law revisions will oblige crypto-asset exchange service providers to manage the assets of their customer’s offline due to the danger of cyber-attacks. As with foreign exchange margin trading, which enables a large amount of trade with a small amount of capital, crypto-assets are treated as financial products under regulations.
From April 2020 onward, crypto exchanges operating in Japan will have to manage user’s money separately from their own cash flows. This means finding a third-party operator to keep hold of the user’s money (this can be a trusted company or any other similar entity).
When managing user’s money reliable methods will have to be used, such as a ‘cold wallet’ (which is highly secured and not connected to the internet) and the other one is ‘hot wallet’ system (not highly secured but connected to internet and vulnerable to phishing and hacking) they have to hold “the same kind and the same quantities of crypto assets” as the user’s crypto assets. This would enable the exchange to reimburse users if the funds get stolen from the platform.
Promulgated on June 14, 2006, is the main statute and codifying securities law and regulating securities companies in Japan.
Revised FIEA documentation introduced the concept of electronically recorded transferable rights (ERTRs) to define that initial coin offerings (ICOs) and security token offerings (STOs) are regulated under the FIEA. ERTRs refer to tokens issued in the expectations of profits (i.e., security tokens).
More specifically, tokens issued under STOs can constitute ERTRs if the three requirements below are met, according to Japanese law firm Anderson Mori &Tomotsune-
The FIEA prohibits anyone from engaging in activities such as dissemination of rumours, usage of fraudulent means for purposes of selling or purchasing or engagement in any transaction in respect to crypto assets or for purposes of engagement in any crypto asset derivative transactions and the likes.
Anderson Mori &Tomotsune has set out the possible areas that may constitute a breach of law by the governing body-
“I think it's great, frankly. With the revised content, customer protection is further pursued, so I think that Japan will be able to become a world leader in virtual currency-related regulations, and the entry of institutional investors will also increase. As new initiatives such as STO are becoming possible, the boundaries between virtual currency and existing finance may be overlapping more and more.”
Said by the Katsuya Konno, head of the CEO office of Fintech company Quoine.
Meanwhile, Coincheck which obtained an exchange license from the FSA in January wrote in-
“By clarifying the target and standards of regulation through the current legal reform, we believe that it will lead to the healthy development of the cryptocurrency legal reform, we believe that it will lead the healthy development of the cryptocurrency industry. On the other hand, the concern is that the term changes to crypto assets may be a setback for cryptocurrency as a mean of payment. I would like to make an effort as an industry to make that not happen.”
FSA (Financial Services Agency) is a Japanese government agency and an iterated financial regulator responsible for overseeing banking securities and exchange and insurance sectors in order to ensure the stability of the financial system of Japan. The agency operates with a commissioner and reports to the minister of state for financial services. It oversees the securities and exchange surveillance commission and the certified public accountants and auditing oversight board. Its main office is located in Tokyo.
After attempting to get ahead with crypto regulation, Japan witnessed two major hacks in 2018. Protecting crypto customers and investors has become a priority, and those who have enough funds to comply with the regulation may be at an advantage. In contrast, it may become harder for crypto entrepreneurs to enter the industry. The FSA, in the comment to Cointelegraph Japan-
“We think the balance between customer protection and innovation is important. We continue to prioritize customer protection and other regulations where appropriate while making sure that they will not be too much for the industry to grow further. “
Moreover, according to the FSA, many elements of Japan’s new laws are included in the recently published IOSCO’s document, which will be used in the upcoming G-20 meeting in a discussion surrounding crypto regulation. The FSA hopes to “share Japanese experiences with G20 members and deepen the mutual understanding.”
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