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Japan to fine-tune crypto regulations to protect investors

Policy & Regulation·November 08, 2024, 3:28 AM

Japan's Financial Services Agency (FSA) is proposing new legislation in an effort to prevent the assets of Japanese investors held on crypto exchanges from being transferred overseas.

 

According to local news outlet Jiji Press, the Japanese regulator recently put forward the idea of drafting such a bill. It’s thought that the move suggests that the Japanese regulators have learned from the collapses of cryptocurrency exchanges Mt. Gox and FTX. 

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Photo by Jaison Lin on Unsplash

Learning from past failures

While Japan already had a higher standard of regulation in place prior to the FTX collapse, likely as a consequence of the authorities having experienced the downfall of Mt. Gox in February 2014, there is still room for improvement. 

 

While funds had been ring-fenced for FTX Japan users, those who accessed services advertised in Japan through the FTX app were deemed to have been accessing a service which fell under an international jurisdiction, denying them the same protections otherwise offered to FTX Japan platform users as a consequence of the regulations that had been put in place.

 

Incorporating a holding order

Japanese media outlet Nikkei described this latest move by the Japanese FSA as follows:

 

“The Financial Services Agency is moving towards creating a new ‘holding order’ in the Payment Services Act, which regulates cryptocurrency exchanges, that will order them not to take domestic assets entrusted to them by customers overseas.”

 

Consequently, the regulator is looking to add this as the latest proposed amendment to the Payment Services Act. Back in September it emerged that amendments to that existing legislation were being looked at with a view towards making it easier for businesses to incorporate digital assets into their service offerings.

 

The regulator has also been mulling over the reclassification of crypto as a financial instrument by amending the Payment Services Act accordingly. Additionally, a more generous tax policy is being proposed. Currently, the Japanese authorities impose a tax rate of up to 55% on cryptocurrency-related revenues. Corporate holders of digital assets have to apply a 30% tax rate, irrespective of income or profits.

 

With that, a 20% tax rate is being considered. The matter became a political issue prior to the East Asian nation’s recent elections, with the leader of the Democratic Party for the People (DPP) backing the application of a 20% crypto tax rate.

 

The application of a holding order has applied previously to companies that have been registered under the Financial Instruments and Exchange Act. This proposed amendment would see it applied to virtual asset trading platforms as part of the Payment Services Act.

 

Guarding against bankruptcy losses

If applied, the amendment would prevent loss of Japanese investor funds in circumstances where a crypto exchange platform goes into bankruptcy. Legal precedent set in the FTX bankruptcy in the United States means that if a user’s funds go into a non-individually segregated hot wallet belonging to an exchange, any property rights, even if explicitly outlined in the terms of service, are lost. 

 

A company can make a case to go into bankruptcy in any international jurisdiction, which means that this precedent has potential implications for all market participants. The proposed amendment from the Japanese FSA would serve to protect investors from such an eventuality.

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