7.3 Licensing System and Self-Regulatory Organizations for Exchanges

According to the amendment to the Payment Services Act, institutions engaged in cryptocurrency trading need to apply for a license from the Japanese Financial Services Agency (FSA) and be regulated by it. Generally, to operate a cryptocurrency exchange in Japan, the following four basic conditions need to be met:

• Entity: Kabushiki Kaisha or foreign cryptocurrency trading institutions (with business places in Japan and representatives in Japan);
• Registered capital: with a financial base, registered capital of more than 10 million yen, and positive net assets;
• Corporate system: a corporate system capable of appropriately and effectively conducting business (such as segregating user assets from company assets, establishing effective risk management systems to prevent risks such as hacking attacks, system failures, money laundering, and terrorist financing);
• Compliance: comply with relevant laws and regulations, protect user privacy, fulfill anti-money laundering obligations, and cooperate with the FSA's inspections and investigations;

All tokens listed on compliant exchanges in Japan need to be approved by the Japan Virtual Currency Exchange Association (JVCEA), a process that takes at least 6 months to a year, which also contributes to the lack of vitality in the Japanese cryptocurrency market.

In addition to FSA regulation, to improve the industry's credibility and transparency, protect investor interests, and promote the healthy development of the cryptocurrency market, Japan established the Japan Virtual Currency Exchange Business Association (JVCEA) in April 2018, initiated by 16 licensed exchanges under the approval and authorization of the Financial Services Agency. The association has formulated a series of self-regulatory rules and guidelines, including:

• Categorizing cryptocurrencies provided by exchanges based on factors such as security, liquidity, and transparency to determine their listing conditions;
• Risk assessment of exchanges, setting maximum leverage ratios, margin ratios, forced liquidation mechanisms, etc.;
• Information disclosure for exchanges, requiring them to publicly disclose trading rules, fee standards, customer complaint handling methods, etc.;
• Consumer education for exchanges to enhance their understanding and awareness of cryptocurrencies;

7.4 Rules for Cryptocurrency Issuance and Financing

In September 2019, the JVCEA issued "New Coin Offering Related Rules" and accompanying guidelines, allowing public issuance and sale of tokens for financing (IEO and ICO). This was Japan's first explicit regulatory framework for cryptocurrency issuance and financing. According to the rules and guidelines, to issue and sell tokens compliantly in Japan, the following conditions must be mainly met:

• The issuer or underwriter must be a licensed exchange and report relevant matters to the FSA and the association;
• Issued tokens must comply with the association's standards for security, liquidity, transparency, etc., and pass the association's review;
• Issued tokens must have a reasonable pricing mechanism and fully disclose relevant information to consumers;
• Issued tokens must be fully sold within a certain period and report sales to the association;Currently, under the "New Coin Offering Related Rules," the frequency of ICOs/IEOs in Japan is not high. On September 26, 2023, to improve the situation of IEOs, the JVCEA further issued an initial proposal for the direction of IEO reform.

In summary, Japan is a country with an open and positive attitude towards blockchain technology and cryptocurrencies. 

It has relatively comprehensive and clear regulations in terms of laws, taxes, licenses, and self-regulation, and is still exploring and innovating to adapt to the rapid changes and diverse application scenarios of blockchain technology, aiming to establish a foothold in the global blockchain industry development. For blockchain entrepreneurs, although Japan has a strong localization sentiment, it still provides a good soil for the establishment and development of the cryptocurrency industry.

8、Conclusion

As early as 2017, Japan officially recognized BTC as a legal currency, and in April 2023, the ruling party's Web3 project team released a white paper, indicating the government's increasing investment in the industry, making Japan's cryptocurrency market increasingly prosperous. However, restrictions such as banning direct investment in tokens and the inability to launch token issuance projects internally in Japan limit the development of DeFi-type projects and businesses in Japan, instead forming an industry characterized by NFTs and gaming.

In terms of compliance, to ensure the stability of the investment market and the safety of investors' assets, Japan has strict laws and regulations in the cryptocurrency field. However, the high cost of compliance and high tax burden hinder the entry and development of projects. In particular, the lengthy approval process for token listings often leads people to believe that the market lacks vitality and lose confidence in this field, while also restricting the innovation of enterprises and the flexibility of the market, resulting in Japan's cryptocurrency industry lagging behind other countries.

With the penetration and development of the cryptocurrency industry globally, institutional investors in Japan have also shown a strong interest in the cryptocurrency market and have a clearer understanding of its potential. The participation of institutional investors has brought more liquidity, stability, and credibility to the Japanese cryptocurrency market, driving the development of the Japanese cryptocurrency industry and attracting more interest from retail and institutional investors.

In the fluctuating regional competition of the cryptocurrency market, Japan has unique advantages in regulatory compliance, GameFi, and NFT fields, and its strong and sustainable community is also an indispensable weapon for industry development. However, overly strict tax policies and investment restrictions still pose strong obstacles to the rise and development of the cryptocurrency industry in Japan. If policy can be moderately opened under the premise of regulatory compliance, it will be more conducive to the rooting, innovation, and development of the cryptocurrency market. Especially the combination of Japan's unique cultural characteristics and a strong financial system may have the opportunity to make it a global leader in the GameFi and NFT fields, leading the future of the global cryptocurrency industry.

Note: All of the above opinions are not investment advice. If there are any inappropriate points, please feel free to leave a message to correct them.

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