In December last year, Emily Parker, Executive Director of CoinDesk, visited Japan and confirmed with her own eyes the current state of the cryptocurrency industry in Japan, as well as the Web3 strategy and its initiatives. What is the current status and future of Web3 in Japan as per Mr. Parker?
“At a time when many countries are standing still and shrugging off headwinds, there is a role that our country, which has witnessed the hardships of the cryptocurrency industry many times, can play.”
That’s what the Liberal Democratic Party’s web3 project team’s proposal says. In other words, while others fear a crisis, Japan sees an opportunity.
Having visited Tokyo recently, it is difficult to express how different Japan is from the rest of the world. He didn’t seem particularly shaken by the FTX debacle and the string of crypto asset sell-offs that preceded it. The FTX bankruptcy “hasn’t had any impact on policymaking,” said Masaaki Taira, a member of the House of Representatives who heads the LDP’s web3 project team (web3PT).
While legislators and regulators in the US, Europe and Asia are increasingly wary of cryptocurrencies, Japan still makes Web3 promotion part of its national strategy. A small but active web3PT proposes guidelines covering NFTs to DAOs (Decentralized Autonomous DAOs).
It is also becoming easier for Japanese exchanges to list crypto assets. Also, strict tax requirements have been revised, which is a big advantage for crypto entrepreneurs.
Coinbase and Kraken have pulled out of Japan, but Binance, which has frustrated Japanese regulators in the past, is eyeing a full-blown entry after buying a Japanese exchange. Furthermore, a new path has emerged for stablecoins, which are currently not allowed to be handled on Japanese exchanges.
Now, reading this far (especially American readers) may raise questions. Why is Japan trying to actively utilize crypto assets now?
ghost of the past
The simplest explanation might be that Japan has already crawled out of hell when it comes to crypto. Japan has already proven that it can weather the storm. So I don’t worry like I used to.
Japan was the first country to adopt cryptocurrencies and quickly experienced setbacks. In 2014, Mt.Gox, said to be the first Bitcoin exchange, was hacked. In early 2018, more than $500 million was hacked from Coincheck, making it the largest loss in cryptocurrency history at the time.
Before Coincheck was hacked, Japan was poised to become the “Asian” if not “global” crypto capital. But the Coincheck hack shocked regulators and Japan seemed to disappear from the crypto world. Listing a new crypto asset on an exchange also seemed almost impossible.
However, in reality, Japan did not disappear, it just took time to put the system in place. After the hacking incident, Japanese regulators required exchanges to separate customer assets from exchange assets and store most of the assets in cold wallets.
Strengths of Japan
And when FTX collapsed, Japan’s regulatory approach played to its strengths.
“FTX Japan’s Japanese customer assets are highly likely to be returned without being significantly affected by the filing of Chapter 11 of the U.S. Bankruptcy Act,” said the Director of the Innovation Promotion Office, Fintech Counselor’s Office, Policy Bureau, Financial Services Agency. said Ryosuke Ushida of
“Most jurisdictions do not segregate crypto assets. In Japan, they are legally segregated. This makes it easier for FTX Japan to return assets to customers.”
“The reason we call for this segregation of assets is that we have learned lessons from past incidents like the Mt Gox and Coincheck hacks. We were used to it. Compared to other jurisdictions, we have a lot of knowledge,” Ushida said.
Related article: Japan was the safest FTX customer in the world ─ What the world can learn from Japanese regulations[Column]
FTX Japan expects to resume asset withdrawals by users as early as February.
Is Japan Leading in Stablecoins?
The FTX bankruptcy was preceded by the collapse of terraUSD (UST), an algorithmic stablecoin on the Terra blockchain, in May 2022.
Concerns about the stability of stablecoins, which play an important role in cryptocurrency trading, have spread around the world. Major stablecoins claim to be pegged one-to-one to fiat currencies such as the US dollar, but it remains questionable whether issuers hold fiat currencies as claimed. .
Various proposals have been made for stablecoins in the United States, and the EU (European Union) is in the final stages of approving regulations on stablecoins under the Markets in Crypto Assets (MiCA) Regulation. Singapore has also proposed rules for stablecoins. But in most cases, regulations are not yet in place.
Again, Japan may lead.
Revised Fund Settlement Act comes into force
“Japan may be the first country to regulate permissionless stablecoins. The US is still debating how to regulate stablecoins. Settlement Act) will come into effect in June 2023,” said Tatsuya Saito, Product Manager, Digital Asset Business Office, Digital Planning Department, Mitsubishi UFJ Trust and Banking.
The trust bank is working to make “Progmat,” which is being developed and provided as a next-generation digital asset platform, independent as a joint venture company by affiliated companies, including rival banks, to make it a “national infrastructure.” Progmat aims to issue stablecoins on both public blockchains like Ethereum and private blockchains.
Related article: Mitsubishi UFJ Trust expands digital asset platform “Progmat” to national infrastructure ─ 7 companies to establish joint venture
So while other countries are trying to keep stablecoins under control, Japan is cautiously going in the opposite direction. Currently, stablecoins are basically not allowed in Japan.
“Tether (USDT) and USD Coin (USDC) are not listed on Japanese exchanges. Generally, we ensure that stablecoins are truly stable, so reserve assets are safe. , Refunds are available upon request,” Ushida said.
Foreign stablecoins to Japan
Now, thanks to new rules, foreign stablecoins have a way forward. Starting in June, Japanese exchanges will be able to apply for special licenses to trade stablecoins. This will allow foreign stablecoins like Tether and USD Coin to enter the Japanese market.
But it’s not easy. According to Saito, in order to handle overseas stablecoins, it is highly likely that a scheme to entrust the underlying asset, the dollar, to a Japanese trust bank will be required, and this will be an extremely strict requirement.
It seems strange that Japan would embrace a stablecoin at a time when much of the world is questioning its stability. We can imagine why Japanese investors and exchanges want stablecoins as a store of value or to migrate to other crypto products, but what are the government’s motives?
One possibility is that “the Japanese government wants to introduce a yen-based stablecoin into the global cryptocurrency trading system and increase the global usage of the Japanese yen,” Saito said.
The Liberal Democratic Party’s web3PT not only embraces the possibilities of NFTs and DAOs, but also proposes proactive policy guidance. Last year, the project team published a fairly detailed NFT white paper.
“Japan possesses a wealth of high-quality intellectual property (Intellectual Property, hereinafter referred to as “IP”) that has international competitiveness, such as anime and games, and is a major global leader in NFT business and Web 3.0. It has hidden potential,” the white paper said. The white paper makes policy recommendations on promoting NFT business development and protecting the rights of content IP holders.
Taira of the LDP web3PT explains that much Japanese content is seriously underrated. This is partly due to the effects of deflation, but also because there are many contents that are still owned by content holders and have not entered the global market. NFTs have the potential to increase their value by digitizing such content and providing a way to reach more people.
“Content holders and large corporations are still very nervous about Web3 and blockchain. There are no clear regulations, so they fear (unintentionally) touching the law,” Taira said.
“Big companies have a lot of money and they have the technology.
DAO is another area where Japan is focusing on becoming a leader. Japan’s Digital Agency has established its own DAO. web3PT positions DAO as an innovation with all kinds of possibilities, from solving social problems to revitalizing local communities and the Japanese economy.
“No country has formally enacted a DAO,” pointed out web3PT member Akihisa Shiozaki, a member of the LDP’s House of Representatives.
“We will introduce the DAO law to make it an option for those who do business in the form of a DAO and want to be protected as an LLC (Limited Liability Company).”
The reason is basically to make people entering the new world feel more at ease. “If you run a DAO and the DAO makes a mistake and causes damage to someone, you may be sued. We need corporate-type protection provisions that limit liability,” Shiozaki said.
Clarification of regulations
One of Japan’s competitive advantages lies in the clarity of its regulations, in contrast to the United States. In the United States, there are various regulatory authorities, including the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), and there are also state regulatory authorities like a patchwork. Japan has only one crypto asset regulator. It’s the Financial Services Agency.
There is still a lot of confusion around securitizing tokens in the US. In Japan, on the other hand, the line is clearly drawn.
“Crypto-assets and securities are different categories, and tokens currently listed on crypto-asset exchanges are crypto-assets, not securities. We have clarified the definition of securities. Article 2 describes what is defined as securities,” Ushida said.
Of course, clarity doesn’t necessarily mean doing business is easy. Taxes remain a high hurdle.
The LDP Tax Commission recently approved a proposal that cryptocurrency startups that issued tokens would not have to pay corporate tax on unrealized gains. But other tax issues remain unresolved.
Expedite listing of crypto assets
Furthermore, listing tokens on Japanese exchanges is still a high hurdle. Tokens must first be approved by the Japan Crypto Asset Exchange Association (JVCEA), an industry group. However, JVCEA is not acting alone.
“The JVCEA will make recommendations to the FSA, case by case. We respect the JVCEA’s decision, but we also need to check,” said Mr. Ushida of the FSA.
The token authorization process has recently been streamlined. In October 2021, there were 86 coins waiting to be listed, but now there are only 9. According to JVCEA, the period for listing approval has been shortened from about two years to three months.
Still, there are voices of dissatisfaction that the listing procedure is slow. For example, there are less than 20 tokens listed on Coinbase in Japan, but over 200 in the US.
Coinbase has just announced its withdrawal from Japan, following Kraken. Coinbase users in Japan must make withdrawals by mid-February. Coinbase cited market conditions as the reason for its withdrawal, but in addition to the difficulty of securing profits in Japan, which is subject to strict regulations, the difficulty of entering a market without a user base for foreign companies may also have had an impact.
Operating an exchange in Japan is not easy. In addition to rules such as separate management of assets and cold wallets, exchanges must deposit customers’ fiat currencies with Japanese trust banks. In addition, there are regular audits to make sure the exchange is adhering to its rules.
“At all times, 100% of customer assets (of the same type and amount) must be held in a cold wallet. In the unlikely event that this is not met, regulations require the crypto assets to be transferred to the cold wallet within 5 days. , Basically within 24 hours.The client’s fiat currency is in a trust bank, etc., and it is easy to check because it is published quarterly as well as regular reports to the regulator.” Said Takaaki Kato, Executive Officer and General Manager of Sales Trading at BitFlyer, one of Japan’s largest crypto asset exchanges.
In addition, it is necessary to hold capital to hedge management risks. “You have to have three months of selling, general and administrative expenses (SG&A), regulatory capital has to outweigh the risk, and that amount is about three to four times.”
Some say such strict rules will hurt profitability. But there are benefits, especially in volatile markets. “Even if Bitcoin continues to drop significantly, we can still have enough capital,” Kato said.
After the drama of 2022, some lawmakers around the world seem to think we have to protect people from crypto. But Japan is very different. There were also opinions that bordered on optimism.
Of course, not all Japanese are cryptocurrency proponents. Many people probably know very little about crypto assets. But those people don’t necessarily get in the way.
“Web3-promoting politicians are in the minority, and there are many politicians who don’t know (about Web3). Let politicians take the initiative and let this blue ocean run around,” Shiozaki said.
｜Translation: coindesk JAPAN
｜Editing: Takayuki Masuda
｜Original: Japan Embraces Web3 As Global Regulators Grow Wary of Crypto