In this article, Joel Mathew, a student of School of Law, UPES discusses Japan’s approach to cryptocurrency`

Introduction

The last couple of years have made every major bank, accounting firm and even the governments of several countries research about the term Cryptocurrency. This was all because of the brain of one man Satoshi Nakamoto, who invented Bitcoin the largest cryptocurrency in the world right now with 1 bitcoin amounting to USD 7,658.97 that makes it INR 5,12,652.82, in the year 2008 and according to a report, there are 1565 and growing cryptocurrencies in the world as of 10th April 2018.

Bitcoin became a hot topic in the year 2014 due to the Mt Gox money laundering case. The leading Bitcoin exchange of the world situated in Japan was shut down and reported itself to be hacked as it lost around 8,50,000 bitcoins of customers and companies and at that time 1 bitcoin was almost equal to USD 450. Hence, money laundering and terrorism funding through VC (Virtual Currency) (cryptocurrency) was the major issue with which the governments and central banks of different countries had to deal with.

Another term which crept up along with bitcoin was Blockchain, it is nothing but a digital ledger in which transactions made in bitcoin or in other cryptocurrencies are recorded.

The Bank for International Settlements had stated that bitcoin could reduce the money issuance power of the central banks. Hence not only bitcoin but all the other cryptocurrencies have become a point to ponder upon for the government and central banks of several nations.

Japan’s Scenario

The Financial Action Task Force (FATF) at the 41st G7 summit at Elmau, Germany on the declaration made by the world leaders published guidelines that required virtual currency exchange to be registered and/or licensed. Following this, Japan implemented changes through proposing amendments in the Payment Services act and Prevention of Transfer of Criminal Proceeds Act.

As other countries in the world, Japan was also affected by the sudden flood of cryptocurrencies in the economy but Japan has proved itself to be a step ahead meanwhile all the other countries were dithered over the cryptocurrency. In the month of November 2016, it made bitcoin its legal payment method. More than 4000 stores in the country started accepting payment in bitcoins. This has lead to the establishment of ATMs that exchange fiat for bitcoin. People can now even pay their utility bills by bitcoin and for this, they are given a special discount

Post Year 2014

After the tragedy in the year 2014 (MTGOX collapse) the government of Japanese lawmakers amended the Payment Services act in order to prevent what happened in MTGOX.

Amendments in the Payment Services Act

Before this amendment, the laws regarding the virtual currency was not entirely clear. The main aim of the Financial Service Agency (FSA) was to make sure that through this amendment there is

1. Proper registration of VC Exchange business in Japan.
2. Prevention of the use of VCs for funding terrorist activities.
3. Prevention of the interest of the customers.
4. Prevention of money laundering.

Definition of Virtual Currency

This amendment gave the virtual currency a proper legal definition in Japan which is,

1. a certain value that may be used to pay compensation for purchasing or borrowing of goods, or receiving services, against unspecified persons, which may be purchased from or sold to unspecified persons and are transferable by an electronic data processing system, however, that such value is limited to those recorded on an electronic device, etc. in an electronic form, and does not include Japanese or foreign currencies, or assets denominated in such currencies or,
2. a certain value that may be exchanged reciprocally for a certain value specified in the preceding item with an unspecified person and that may be transferred using an electronic data processing system.

Definition of VC Exchange Business

The proposed amendment defined VC Exchange business as conducting or undertaking the following acts as a business:

1. Purchase and sale of VCs or exchange of VCs with other VCs.
2. Acting as an agent for the acts listed in item (i) of the act.
3. Management of customer’s cash or VCs in relation to the acts listed in item (i) of the act.

Registration of VC Exchange Services

The firm which wants to start a VC Exchange business in Japan is required to register itself as VC Exchanger with the Prime Minister. This applies to foreign companies as well provided they are permitted by their homeland laws to conduct VC Exchange. A VC Exchange service provider who does obtain such registration can not make solicitations to the Japanese people.

Requirements to be fulfilled by the applicant

There are several other requirements that a firm, who are applying under the amended act to start a VC Exchange Business, needs to fulfil.

1. The firm should have a status of Japanese joint-stock company i.e. a joint stock company under the Japanese law.
2. It should have at least JPY 10 million capital and positive net assets.
3. The form should have an internal body or a system to make sure that the company after starting such business complies with the relevant rules as stated in the act.
4. In the case of the foreign VC exchange service provider, the company should have a representative person in Japan i.e. the person should be domiciled in Japan.

Regulations on the business of the VC Exchange Service Provider

For the prevention of investors and customers, the act states that the company while conducting business should make sure the following

1. Safe administration of customer information
2. Lawful use of undisclosed information which includes the sensitive data of the customers.
3. Customers cash should be segregated from that of the company i.e. a proper account in the name of the customer so that it is identifiable that the account belongs to so and so customer.
4. A Virtual Currency Exchange Service Provider in the event of any dispute with customers is required to seek a resolution to such dispute through financial ADR proceedings.

Supervision over the VC Exchange Service Provider

1. The Company is required to prepare and maintain books and records regarding the Vc exchange services
2. To prepare a report on the VC Exchange Services for each business year and submit the same to the Prime Minister accompanied by financial documents and certified by public accountant’s or audit firm’s audit report on such document.
3. Power of the Prime Minister- He may order the VC Exchange Service Provider to submit reports or materials or have officials enter its office or other facilities and if the VC Exchange Service Provider does not fulfill the above-mentioned requirements for the registration and has obtained the registration through fraudulent means or has violated the Act or an order issued by the in the pursuance of the act the PM may revoke the registration or order the VC Exchange Service Provider to suspend all or part of its services for a specified period of time but the said time will not be more than six months.

Penal Provisions applicable to The VC Exchange Service Providers

Japan not only made the registration process full of formalities but has also made sure if such rules and formalities are not complied with then in that case proper punishment is given as

1. There is an imprisonment for up to 3 years along with a work fine of up to JPY 3 million. For violating the registration rules, obtaining registration through fraudulent means and name lending.
2. Whereas imprisonment for two years or a fine up to JPY 3 million or both for violating the obligation to segregate users money and virtual currency or violation of the order to suspend the VC Exchange Service.
3. If the company fails to follow the orders given by the PM or fails to submit the report along with the attached documents for each business year the officials can be punished with an imprisonment for not more than one year or with a fine up to JPY 3 million or both.
4. If a false statement has been given in the registration application or attached documents the there is a punished with an imprisonment of not more than six months or with a fine of JPY 5,000 or both.

All the imprisonment is along with required labour.

Amendments in the Prevention of Transfer of Criminal Proceeds regarding VC Act

In order to prevent or prohibit the use of VCs for terrorist activities

1. The VC Exchange Service Providers are required to conduct KYC (know your customer) at the time of intake of the customer which includes the service provider should must verify the customer identification data, the purpose for which the transaction by the customer has been made and under some circumstances status of assets and income of the customer. The same should be used when the customer is making transactions which are to make sure the proper person making the transactions.
2. Keep the records of the transactions made by the customer. This is where the blockchain plays an important role.
3. The service provider must have customer identification records and maintain such record for seven years from the day on which the contract for specified transaction, etc terminates.
4. The service provider has an obligation to report suspicious transactions to the relevant authority.

Blockchain regulations

It is the world’s leading software for management of digital assets. This acts as a ledger for the VCs making an account for every VC spent.

In Japan, the Japan cryptocurrency Association and Japan Blockchain Association have merged into a new self-regulatory organization following a request by the FSA (Financial Service Agency) to prevent coin hack.

After Amendment

Quoine, a company from Singapore were the first global cryptocurrency firm in the world to be officially licensed by the Japan Financial Services Agency. This rise in the exchanges helped some homegrown cryptocurrencies to develop. According to Forbes, Monocoin which is the homegrown digital currency of Japan, popular among the gamers is the world’s 35th largest cryptocurrency in terms of market cap.

Japan, as stated earlier in the month of November 2016 by another amendment in the Payment Services act, made bitcoin a legal form of payment. Flourishment of cryptocurrencies in Japan was not only due to the official stamp is given by the government but also due to the restrictive policy of the neighbouring countries as China and Korea had cracked down on cryptocurrencies and prohibited ICO.

Initial Coin Offering

ICO stands for Initial coin offering. It is done in order to collect/raise funds for a new cryptocurrency venture or in simple words it can be said that they are like shares which are brought in a new company by its investors. As in the case of Japan, we can see due to the virtual currency friendly regulations Japan has its native cryptocurrency namely Nem and Monocoin in the top 35 cryptocurrency in the terms of market cap.

Conclusion

According to a national daily of Japan, Japan Times, Japan has become a global leader in the development of cryptocurrency and due to this, the JPY amounts to 56.2 per cent of Bitcoin, or BTC, the most popular cryptocurrency, according to coinhills.com. Before this, the Chinese Yuan used to account for the largest until January 2017 but due to its restrictive policies, it went down. All credits for Japan’s position in the cryptocurrency market goes to its solid legal system which not only regularised the VC market but also gave it a boom.

This step of Japanese lawmakers is a boon or a bane for its economy will be answered with time but for the time being, JPY amounts to 56.2% of the BTC at the time when 1BTC is amounting to USD 7387.72. Seeing Japan countries like the USA are now regulating the VC Exchange business. The taxes on the BTC transactions are paying a large amount to the government of Japan (on every BTC investment USD 26 is received by the government). However, there is a risk of decline in the value of BTC if the transaction fee continues to be high.