Changes in Japan's Financial Sector

In 2020, a number of amendments to laws governing the work of the financial sector come into force in Japan - the Law on Financial Instruments and Exchanges (FIEA) and the Law on Payment Services (PSA). the amendments were introduced for consideration at the 198th session of the parliament on March 15, 2019, and the law with new amendments was adopted on May 31, 2019. The most significant change is the introduction of new requirements for the operation of cryptocurrency exchanges and cryptocurrency exchanges. This article will examine both existing regulations and changes.

Since cryptocurrencies can be used for trading as a means of payment for goods and services, cryptocurrency exchange operators and enterprises must have a separate institution that will operate under a virtual currency exchange license to process virtual currencies. In accordance with the law “On payment services”, they are considered payment institutions.

Cryptocurrency storage service providers (wallets) are required to register if they are part of the cryptocurrency exchange service. Without registration, only those services that provide simple wallets that are not related to the exchange of cryptocurrencies can go through.

The requirements for a company that wants to obtain a cryptocurrency license in Japan are as follows:

• The presence of an office in Japan;
• The minimum authorized capital is 10 million yen;
• The presence of a local representative - a resident or citizen of Japan;
• Availability of managers for the internal audit department, technology department, and compliance department. One person can fulfill only one of the three roles. Hired staff should be aware of financial regulation in Japan and be able to communicate with Japanese government authorities;
• KYC policy;
• AML policy;
• Consumer protection policy.

Next, we turn to changes related to amendments to the laws governing the financial market of Japan.

In particular, the amendments introduce new rules for security tokens, ICO (initial coin offering) and STO (initial security tokens offering) and are aimed at strengthening regulation of the cryptocurrency exchange market.

In accordance with the bill, virtual currencies are renamed crypto assets, and cryptocurrency exchange service providers are renamed crypto-asset exchange service providers.

It is noteworthy that in accordance with the new amendments, the law considers crypto assets as money that can be used as a reward for certain transactions, including participation in a collective investment scheme or for the purchase of securities.

Thus, the bill clarifies that digital tokens issued in exchange for crypto assets will be considered as securities and fall within the scope of the law “On financial instruments and exchanges”.

Also, according to new amendments, the right to receive dividends from funds or some other types of interest or rights in cryptocurrencies will be regulated as securities in accordance with the Law on Financial Instruments and Exchanges, not as cryptocurrencies.

From the moment the amendments enter into force, security tokens will be excluded from the definition of crypto assets. Moreover, the rights represented by such digital tokens will be considered securities subject to stricter regulation in accordance with the Law on Financial Instruments and Exchanges.

Thus, security tokens fall within the scope of securities regulation and under the strict rules of regulation of this market. The issuer of security tokens must now comply with a strict public information disclosure system that is appropriate for securities. The issuer of such digital tokens must submit an application for registration of securities (SRS), which will be available to the general public and will also have to submit annual reports and bear other obligations for continuous public disclosure of information.

Intermediaries and issuers registered as FIBOs (Financial Instrument Operators) are subject to the FIEA Rules. The rules of due diligence of counterparties, the requirements for the provision of explanatory documents, as well as the requirements for the prevention of fraudulent transactions, are applied to them, too.

The amendments prohibit unfair trading of crypto assets, in essence, just as unfair transactions with securities and derivative financial instruments are prohibited. However, with regard to enforcement measures, the bill provides for criminal liability for violators (as opposed to unfair transactions with securities and derivative financial instruments, where administrative sanctions are not applied).

The effective date of the new version of the Law on Financial Instruments and Exchanges is May 31, 2020.

It is worthwhile to clarify that if an ICO or STO has started before the bill comes into force and continues after that date, then the ICO or STO will be subject to the current Law on Financial Instruments and Exchanges.