Japan's FSA Clarifies Regulatory Position on Initial Coin Offerings, Warns of Risks

by Jones Day
Contact

Jones Day

In Short

The Situation: The Financial Services Agency of Japan ("FSA") has released a statement on initial coin offerings ("ICOs"). It clarifies the regulatory position of ICOs under Japanese law and also highlights potential risks to consumers of participating in ICOs.

The Results: The FSA has made clear that, depending on the structure used, ICOs may be regulated under Japanese law, including by the Payment Services Act and the Financial Instruments and Exchange Act. It has also emphasized that a person engaging in ICO activities without required registrations may be subject to criminal penalties.

Looking Ahead: Parties engaging in ICO activities should seek appropriate legal and other professional advice to ensure compliance with the applicable legal and regulatory requirements in Japan.


In light of the increased use of ICOs to raise funds in Japan and elsewhere, the FSA issued a statement on October 27, 2017 ("FSA Statement") to clarify the regulatory position of ICOs under Japanese law.

How are ICOs Regulated under Japanese Law?

Payment Services Act

First, the FSA has indicated in the FSA Statement that "certain digital tokens issued by ICOs may fall into the definition of virtual currency under the Payment Services Act and thus an operator involving the exchange of such digital tokens as its business must be registered with the FSA."

By way of background, Japan has been a leading nation in its approach to regulation of certain virtual currencies under the amended Payment Services Act, which came into force in April 2017 and which introduces the registration requirement for operators of "Virtual Currency Exchange Businesses" (defined as businesses engaging in the exchange of virtual currency for legal currency or another virtual currency or brokerage of such exchange).

Following the six-month grace period that ended on September 30, 2017, the Payment Services Act has been fully enforced, and the FSA recently announced the first 11 companies that completed the registrations as operators of the Virtual Currency Exchange Business.

Under the amended Payment Services Act, "virtual currency" is defined as a proprietary value that satisfies all of the following criteria:

  • Between unspecified persons: (i) it can be used to settle payments for goods and/or services and exchanged with legal currency; or (ii) it can be exchanged with another virtual currency.
  • It can be transferred using an electronic data processing system.
  • It is not denominated in Japanese Yen or any foreign legal currency.

Therefore, if digital tokens issued by an ICO meet the criteria above and are therefore categorized as virtual currencies, an issuer and promoter of the ICO is required to register as an operator of a Virtual Currency Exchange Business.

In this connection, all digital tokens issued by ICOs are not necessarily categorized as virtual currencies under the Payment Services Act. For example, if the transfer of digital tokens is restricted by the issuer, depending on facts and circumstances, the regulators may conclude that the digital tokens are not virtual currencies because, between unspecified persons, they can neither: (i) be used to settle payments for goods and/or services and exchanged with legal currency nor (ii) be exchanged with another virtual currency (that does not meet the criteria of the first bullet point above).

Although the FSA did not specifically refer to it, the FSA Statement clarifies this issue because it states that "certain" (but not all) digital tokens may fall into the definition of "virtual currency."

Financial Instruments and Exchange Act

Second, the FSA Statement noted that ICOs may also be subject to the Japanese securities law, the Financial Instruments and Exchange Act ("FIEA").

The FIEA regulates so-called "collective investment schemes" and securities, and the marketing and management of funds or other assets collected through any collective investment scheme require registration with the FSA, unless any specific exemptions apply.

The definition of a "collective investment scheme" under the FIEA is broad, and it generally covers any arrangement (regardless of its legal form) under which cash and cash equivalent are collected from investors to invest in a certain business and investors are entitled to receive dividends or distribution of assets.

In this connection, prior to the FSA Statement, there was a market view that ICOs should not be categorized as collective investment schemes because ICO participants usually pay virtual currencies (such as Bitcoin or Ethereum's Ether) in consideration for digital tokens, and such virtual currencies are not "cash and cash equivalent" in the context of the FIEA.

However, the FSA Statement has clearly rejected such view by stating that, "if an ICO has characteristics of an investment and the purchase of a digital token by a virtual currency is in fact deemed equivalent to that by a legal currency, an ICO will be subject to the regulations under the FIEA." This approach by the FSA is also fully consistent with the official recognition of use of certain virtual currencies, such as Bitcoin, in Japan under the Payments Services Act.

If an ICO is deemed as a collective investments scheme, the issuer and promoter of the ICO is required to be registered as an operator of a Type II Financial Instruments Exchange Business and/or Investment Management Business, and it will also be subject to various regulations under the FIEA.

Potential Risk on ICOs to Participants

The FSA Statement has emphasized that an ICO has other "high" risks and that ICO participants should participate in the ICO at their own risk after duly analyzing such risks, as well as the details, of an ICO project.

  • Price volatility: The value of digital tokens may suddenly decline or even become worthless.
  • Potential for fraud: Projects in a white paper may not be implemented, or goods and services planned may not be offered in fact.

This confirms that the FSA's commitment to protecting investors from fraud remains the same, regardless of the technologies involved and the means of raising capital.


Two Key Takeaways

  1. Parties engaging in ICO activities should seek appropriate legal and other professional advice to ensure compliance with the applicable legal and regulatory requirements in Japan.
  2. The FSA is planning to reorganize legislation in order to introduce a cross-sectoral regulatory regime for fintech industries, which may have impacts on ICOs. Future developments should be closely monitored.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Jones Day | Attorney Advertising

Written by:

Jones Day
Contact
more
less

Jones Day on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.