A recent proposal issued by Japan’s ruling Liberal Democratic Party, along with various other current private- and public-sector initiatives, signals a strong interest in promoting investment in and the growth of an internationally competitive Web3 business environment in Japan. Although only limited reforms have been adopted to date, the likelihood of further revisions to relevant regulations is expected to increase over the course of 2023 and beyond to address existing laws discouraging the adoption and use of cryptocurrency, DAOs, NFTs, and other Web3 technologies. These reforms are likely to focus on revising the tax code related to cryptocurrency holdings, revising processes for listing cryptocurrencies on public exchanges, facilitating the adoption of stablecoins, and recognizing the legal status of DAOs.

Japan’s ruling Liberal Democratic Party (LDP) released an interim proposal on Web3 policies last December (Proposal)[1] signaling the Japanese government’s commitment to fostering the growth of Web3 businesses in Japan. Following recent similar announcements in other countries,[2] the Proposal outlines several measures to revisit and potentially revise existing regulations to encourage increased investment in, and accelerate development of, an internationally competitive Web3 business environment in Japan.

Unlike the current World Wide Web, Web2, which is heavily centralized and relies on tech giants and other intermediaries to facilitate online transactions, Web3 aims to remove the need for intermediaries by using decentralized applications, such as non-fungible tokens (NFTs) and cryptocurrencies, smart contracts, decentralized autonomous organizations (DAOs), and other blockchain technologies.

In line with its reputation as a global innovation and technology leader, Japan was an early adopter of cryptocurrencies and other Web3 technologies. However, it experienced several setbacks that impacted its ability to capitalize on these emerging technologies. For example, in 2014, Mt. Gox, the largest Bitcoin exchange at the time, was hacked and approximately $470 million in value was lost. The Mt. Gox hack significantly impacted the reputation of Bitcoin and other cryptocurrencies in Japan, with many Japanese regulators and lawmakers subsequently questioning cryptocurrency’s security and reliability. The result was increased regulatory scrutiny of the cryptocurrency industry. In 2018, another Japan-based cryptocurrency exchange, Coincheck, was hacked, resulting in a loss of approximately $530 million in value (which remains one of the largest cryptocurrency hacks to date).[3] Following the Coincheck hack, Japan’s Financial Services Agency (FSA) further tightened regulations on cryptocurrency exchanges in Japan, resulting in Japan becoming a much smaller player in the global crypto market. Japan’s regulatory changes also made it much less appealing to investors and startups, in particular as Japanese regulations affecting the registration of exchanges operating in Japan required a lengthy application process and were subject to other requirements that significantly limited the ability of exchanges to grow and scale.[4] However, Japan’s stricter regulatory framework has allowed it to weather recent disasters in crypto markets, such as the FTX crash, relatively unfazed.

While other countries are struggling to deal with recent developments in the cryptocurrency market, Japan is again ready to place itself at the forefront of Web3 technologies and promote their growth as part of its national strategy and to “develop the necessary environment for the realization of a decentralized digital society.”[5] In early February, Japanese Prime Minister Fumio Kishida stated that the use of NFTs and DAOs in Japan could support Japan’s strategies to attract investment and expand the economy.[6] As Japan embraces a Web3 future, it is developing policies and guidelines for NFTs and other Web3 technologies. We discuss a selection of these briefly below, starting with the Proposal and then addressing a few additional initiatives to drive growth in this space.

LDP Web3 Project Team Interim Proposal

The Proposal released by the LDP last December includes several revisions relating to the Japanese government’s desire to promote investment in and the growth of the Web3 ecosystem in Japan. We focus on three of the potentially more impactful proposals and mention others in brief.

(1) Tax Code Revisions. The Proposal’s proposed revisions to the tax code are aimed at reducing prior regulatory concerns that discouraged Web3 investors from focusing on Japan. The LDP’s Web3 Project Team (Project Team) acknowledged that existing corporate taxation policies, which are based on the market valuation of crypto assets assessed at the end of each tax year, adversely affects the competitiveness of many Web3-based businesses. Under existing regulations, if tokens are listed on an active market, the corporate holders of such tokens are required to pay yearly taxes on any unrealized gains from their holdings even if they have not sold their assets and these gains are only on paper (also referred to as “year-end mark-to-market taxation”). To correct this, the Project Team proposes that tokens be excluded from taxation on unrealized gains. This proposal was accepted and will come into effect later this year. The Project Team made a few additional, tax-related proposals that were not adopted as part of the FY2023 tax reform but remain under consideration, including:

• Excluding tokens issued by companies and held by third parties that are not for “short-term trading purposes” from year-end mark-to-market taxation, to similarly reduce the tax burden on companies considering investing in tokens.
• Revising taxation policies applicable to token transactions conducted by individuals in Japan, which are currently taxed as miscellaneous income at a maximum rate of 55% (and have resulted in an outflow of taxpayers overseas) in favor of a 20% tax rate, exempting from taxation token-for-token transactions, applying the revised tax rate only when tokens are converted to fiat, and allowing losses on tokens to be carried forward for three years.

(2) Revisions to Japan Virtual and Crypto Assets Exchange Association (JVCEA) Policies. In response to concerns over the JVCEA’s inefficient and opaque screening process for adding tokens to an applicant’s (i.e., a crypto asset service provider’s) listing portfolio, the Project Team recommends increasing the transparency of the screening process and strengthening the JVCEA organization. To increase transparency, the Project Team suggests that the JVCEA specify the factors considered in connection with new token examinations and, at a minimum, make related criteria available to applicants so that they can facilitate the JVCEA’s review process. To strengthen the JVCEA’s organization, the Project Team proposes that the JVCEA consider establishing mechanisms to ensure the “neutrality and objectivity of the token examination process,” such as by clarifying information management and disclosure rules regarding the examination and increasing the knowledge and capabilities of its examination staff. The Project Team expects the FSA, which has supervisory authority over the JVCEA, to provide guidance and increased consultation to the JVCEA regarding its efforts. It is unclear if the JVCEA-related proposals will be adopted. However, the outlook is promising given that separate proposals made in April 2022 by the LDP’s NFT Policy Study Project Team regarding streamlining the pre-screening process have already been implemented to reduce examination time.[7]

(3) Registration for DAOs as LLCs. Considering the growing prevalence of DAOs in other countries, the Project Team stressed the need to reconsider the legal status of DOAs in Japan, given their potential to revitalize Japan’s economy by facilitating community management and regional development. Currently, given the uncertainty surrounding the legal parameters of smart contracts, governance tokens, and DAOs themselves, entities are reluctant to embrace DAOs. The Project Team suggests revisiting prior proposals to enable registration of DAOs as legal entities to enable them, like limited liability companies (Goda Kaisha) in Japan, to avail themselves of liability protection for the natural people who own the entity and facilitate commercial activities such as opening bank accounts and executing contracts.

Specifically, the Project Team proposes that a special law for LLC-type DAOs be introduced, where regulations on limited liability companies under Japan’s Companies Act[8] and regulations on tokens under the Financial Instruments and Exchange Act[9] would be modified and applied to DAOs. Rules that would be unsuitable for a DAO, such as listing members’ names and addresses in the articles of incorporation, would be altered. The Project Team also emphasized that the intent of the legislation should be to increase the options available for establishing DAOs and not to deny any activities or establishment of DAOs under other legal forms.

(4) Other Proposals. Lastly, the Project Team recommends that the Japanese government assist with a variety of additional initiatives including:

• Establishing Audit Guidelines for Web3 Companies. Crypto-related businesses have had difficulty obtaining accounting audits. The Project Team urges the Accounting Standards Board of Japan (ASBJ) to catch up with other countries by further developing Japan’s accounting standards and guidelines for crypto assets. In addition, the Project Team proposes that Japanese ministries and agencies facilitate discussions between Web3 businesses and accountants to ensure that the businesses have the governance systems necessary to commission successful audits.
• Promoting Stablecoins. To promote Japan’s competitiveness in digital asset trading and other Web3 industries, the Project Team proposes that Japanese regulators adopt frameworks that allow domestic intermediaries to handle stablecoins pegged to foreign currency safely, but without undue burden. To accomplish this, the Project Team suggests the Japanese government adopt measures to ensure adequate protection of domestic users in the event of a foreign issuer or domestic intermediary and clarify rules for transferring rights between stablecoin holders to secure transactions. To further promote the growth of a domestic stablecoin market, the Proposal also suggests the Japanese government promote the study of stablecoins by domestic financial institutions to make yen-pegged stablecoins a viable business.
• Protection Against Unlicensed NFTs. Conscious of the scope of unlicensed NFTs being commercialized in the market, the Project Team noted that, to support the growth of a robust NFT market in Japan, it is vital that NFT rightsholders be encouraged to request that trading platforms remove unlicensed NFTs. While there are some government- and private sector-led efforts in place today to facilitate this, the Project Team suggests the Japanese government increase the scope of information available in English to empower NFT rightsholders and also continue to provide funding to support initiatives designed to eliminate unlicensed NFTs from the market.
• Clarifying Gambling Regulations. The Project Team proposed that gambling and other regulations, including rules regarding returns from secondary distributions of NFTs, be clarified to facilitate the development of fantasy sports Web3 businesses.

Many of the Project Team’s recommendations are being considered and may be adopted by the Japanese government. The Project Team has signaled that it plans to compile the above (and other) recommendations in the form of a white paper, which it plans to issue in the first half of 2023.

The above proposals are in addition to other Web3-related initiatives that have been initiated by other ministries and agencies of the Japanese government, including the Ministry of Economy, Trade and Industry (METI), Digital Agency, the FSA, and Agency for Cultural Affairs, which may further impact regulation in this space.[10] A few notable Japanese Web3-related initiatives are briefly introduced below.

METI Web3 Study Group

In addition to creating a “Web3 Policy Office” in the Minister’s Secretariat, METI recently launched a Web3-related study group to understand how the Japanese government could “construct and expand an internationally competitive metaverse economic zone,” where Japanese companies and individual content creators can make their creative media (e.g., games, movies, anime, music, and books) more easily accessible to consumers overseas.[11] METI believes that one of Japan’s strengths is its intellectual property and that fostering new economic activities around such intellectual property may help revitalize the Japanese economy. For example, anime and other popular media could be sold as NFTs or used in new ways in the metaverse to foster relationships between creators and fans or businesses and consumers. METI is currently reviewing legal issues and other barriers to entry that may prevent individual content creators and businesses from fully exploiting their IP. METI is also working closely with industry associations and creating a forum to discuss issues in the hopes of further informing subsequent policy.

BOJ Digital Yen Pilot Program

In January, the Bank of Japan (BOJ) announced that it will launch a multi-year pilot program in April to test using a digital Yen.[12] Private financial institutions and settlement service providers will be invited to take part in testing the experimental system. However, the pilot will not involve actual transactions between retailers and consumers. Rather, the program will perform simulated transactions to evaluate potential challenges in connecting the system with external networks. A consultative forum will also be launched to discuss implementation and related issues with businesses. Expected benefits of a digital Yen that the BOJ is hopeful for include faster and more efficient payments, security, and easy access to banking services.

Japan Metaverse Economic Zone

Japanese technology enterprises are also partnering with each other to support Web3 initiatives in Japan. Fujitsu Ltd. and nine other companies (including Mitsubishi UFJ Financial Group, Inc., Mizuho Financial Group, Inc., and Sumitomo Mitsui Financial Group, Inc.) entered into an agreement to integrate their respective services and technologies to create a Japan Metaverse Economic Zone and build “RYUGUKOKU (TBD),” an Open Metaverse Infrastructure for enterprises.[13] The organizations intend to enable interoperability between different Metaverse platforms and create a social infrastructure for digital transformation. RYUGUKOKU will incorporate elements of an online role-playing game with a unique fantasy worldview while enabling safe methods for identity authentication, payments, and data transfers.

While the net effect of proposed regulatory changes and other initiatives noted above is not yet clear, Japan’s intent to solidify its position as a global leader in Web3 technologies is reflected in the Proposal and other recent developments. Collectively, these underscore the commitment of both Japanese government agencies and private businesses to promote continued development and innovation in Japan.

[1] Liberal Democratic Party of Japan Headquarters for the Promotion of Digital Society web3 Project Team, Interim Proposal on web3 Policy (December 2022).

[2] The European Parliament is expected to vote on and pass the proposed EU Markets in Crypto Assets (MiCA) regulation in April, which is intended to create and harmonize rules for issuing and trading crypto assets. See Stefan Berger, Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-Assets (February 20, 2023). In the United States, various government agencies in 2022 submitted to the president frameworks and policy recommendations regarding digital assets to drive potential policy changes regarding how digital assets are regulated. See FACT SHEET: White House Releases First-Ever Comprehensive Framework for Responsible Development of Digital Assets (September 16, 2022).

[3] As of March 2023, both Coincheck and Mt. Gox rank among the top 10 cryptocurrency thefts. The largest amount lost via hacks occurred in March 2022 with the hack on Axie Infinity’s Ronin Network, resulting in a loss of $625 million. See Kevin George, The Largest Cryptocurrency Hacks So Far (November 17, 2022).

[4] For example, before a crypto asset service provider can add a crypto asset (e.g., a token) to its listing portfolio, the Japan Virtual and Crypto Assets Exchange Association (JVCEA) is required to review the crypto asset. The process has been criticized as unnecessarily long, subject to a lack of transparency, and subjugating assets to review based on qualitative and unclear criteria. See footnote 1.

[5] See footnote 1.

[6] R5.02.01 衆議院予算委員会（平将明 vs 岸田文雄 総理大臣、松野博一 官房長官、河野太郎 デジタル大臣(R5.02.01 House of Representatives Budget Committee) (February 1, 2023).

[7] For example, the JVCEA introduced the “Green List System,” which allows for certain crypto asset exchange service providers to handle crypto assets without first being screened by the JVCEA.

[8] See Companies Act (Part I, Part II, Part III and Part IV).

[9] See Financial Instruments and Exchange Act (Act No. 25 of 1948).

[10] See Digital Agency report in footnote 9.

[11] METI, Study Group Members and Overall Roadmap for the Research Project on Constructing Web-3.0-Era Creator Economies to Be Published (August 23, 2022).

[12] NHK World-Japan, BOJ to Start Pilot Program for Digital Yen (February 20, 2022). This program follows countries such as China, Nigeria, and India that have either fully launched digital currencies or issued them as part of a pilot program.

[13] Fujitsu Limited, Agreement on the Creation of the “Japan Metaverse Economic Zone” (February 27, 2022).

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