Update Date: 03.05.2023
Japan is one of the few countries in the world that has taken a proactive approach to regulating cryptocurrencies. In April 2017, the Payment Services Act (PSA) recognized Bitcoin and other virtual assets as legitimate property. Since then, the country has been at the forefront of cryptocurrency regulation, implementing several updates and amendments to its existing regulatory framework.
One of the most significant changes in Japan's regulatory environment was made in May 2020 when amendments to the PSA and the Financial Instruments and Exchange Act (FIEA) were introduced. These revisions replaced the term "virtual currency" with "crypto-asset," which brought greater clarity to the regulation of cryptocurrency exchanges and trading platforms.
Under the PSA, cryptocurrency exchanges in Japan are required to register with the Financial Services Agency (FSA) and follow traditional AML/CFT responsibilities. This legislation has helped to ensure that crypto exchanges in Japan operate in a transparent and secure manner, providing greater protection to investors.
Moreover, the National Tax Agency of Japan has classified earnings on cryptocurrencies as "miscellaneous income" since December 2017. This classification ensures that purchasers of cryptocurrencies are taxed accordingly.
The Act on Prevention of Transfer of Criminal Proceeds (APTCP) establishes AML standards for crypto assets, which are enforced by Japan's financial intelligence unit, the Japan Financial Intelligence Center (JAFIC). The APTCP requires Virtual Asset Service Providers (VASPs) that provide exchange services to undertake strict KYC (Know-Your-Customer) checks and keep track of questionable transactions. This includes verifying the identity of customers and maintaining transaction records for at least seven years.
Additionally, any suspicious transactions must be reported to the appropriate authorities, and any transaction above 30 million JPY (209,000 GBP), in crypto or fiat, must be notified to the Ministry of Finance following the Foreign Exchange and Foreign Trade Act.
It is worth noting that the APTCP applies not only to cryptocurrency exchanges but also to other crypto-related businesses, including cryptocurrency custody service providers and cryptocurrency derivatives companies. Cryptocurrency custody service providers that do not buy or sell crypto assets are covered by the PSA, while cryptocurrency derivatives companies are covered by the FIEA.
Cryptocurrency Exchange Regulations
Japan is updating its regulations for crypto exchanges. To operate as a cryptocurrency exchange under the PSA, only companies with a highly qualified Financial Bureau are eligible. However, international cryptocurrency exchanges can work in Japan if they can demonstrate an equivalent registration standard in their home country, in line with Japan's progressive approach.
Although exchanges are permitted in Japan, the country has made crypto laws a top priority following a number of high-profile security breaches, including the Coincheck heist, which resulted in the theft of $530 million worth of digital currency. To strengthen trading and exchanges, Japan's FSA has stepped up its efforts. Amendments to the PSA now require cryptocurrency traders to register with the FSA in order to operate, a process which can take up to six months and includes stricter cybersecurity and AML/CFT requirements. The rules for exchanges in Japan primarily aim to protect market integrity, and users, investors, and exchanges must comply with specific record-keeping standards.
The FSA is currently working on establishing guidelines for the Application of the "crypto Travel Rule" to Virtual Asset Service Providers (VASPs) in Japan, known as the APTCP. The FSA recently initiated a consultation on these guidelines, and the APTCP will be enacted once they are finalized. The Japan Virtual Currency Exchange Association (JVCEA) received a Request for Notification of Originator and Beneficiary Information upon Crypto Assets Transfer from the FSA in March 2021, urging them to adopt self-regulatory rules concerning the Travel Rule by April 2022. Consequently, JVCEA introduced the Travel Rule in the Self-Regulatory Rules of the Association for VASPs in April 2022. Later on, the Cabinet Secretariat passed an amendment to the APTCP in December 2022, enforcing the crypto Travel Rule.
In February 2023, the FSA launched a consultation on draft Cabinet Orders to partially revise the Order for Enforcement of the APTCP, which will specify how the Travel Rule applies to Japanese VASPs. The public consultation on the Order for Enforcement of the APTCP will be announced soon.
Changes in Cryptocurrency Rules in Japan
In October 2018, the Financial Action Task Force (FATF) made updates to its recommendations. As a result of these changes, crypto asset exchangers, custodians of crypto assets, and others will now be required to adopt anti-money laundering and counter-terrorism funding measures. On May 1, 2020, amendments to the Payment Service Act were put into effect to align with the FATF guidelines.
The following are the key components of the changes in the Payment Service Act.
- Since most crypto assets are not used as currencies, they are now referred to as "crypto-assets" instead of "virtual currencies." Advertising for "speculative investments" in the crypto world is restricted. In addition, requirements have been imposed regarding in-advance alerts for applications to become a crypto asset exchanger.
- The changes also include regulations for online advertising of crypto asset exchangers, prohibited actions, provision of information to users, and other measures to ensure user security, as well as handling users' monetary and crypto assets.
The FSA in Japan is currently working on developing guidelines for the "crypto Travel Rule" application to Virtual Asset Service Providers (VASPs), known as APTCP. The FSA has recently launched a consultation process to finalize these guidelines. Once implemented, the APTCP will become effective. In March 2021, the Japan Virtual Currency Exchange Association (JVCEA) requested the FSA to Notify Sender and Beneficiary Information on Crypto Asset Transfer and to adopt self-regulating rules regarding the Travel Rule by April 2022. As a result, the JVCEA implemented the Travel Rule in the VASPs Association's Self-Regulation Rules in April 2022. The Cabinet Secretariat later amended the APTCP in December 2022, enforcing the crypto Travel Rule.
In February 2023, the FSA launched a consultation on draft Cabinet Orders to partially revise the APTCP's Enforcement Order. This revision will determine how the Travel Rule applies to Japanese VASPs. The announcement for public consultation on the implementation of APTCP will be made soon.
The Last Words
Japan is one of the few countries that has proactively regulated cryptocurrencies to provide investors with transparency, security, and protection. The PSA recognized Bitcoin and other virtual assets as legitimate property in April 2017. Since then, Japan has implemented several updates and amendments to its existing regulatory framework, including replacing the term "virtual currency" with "crypto-asset," which brought greater clarity to the regulation of cryptocurrency exchanges and trading platforms. Moreover, the country has established AML/CFT responsibilities, KYC checks, and record-keeping standards to ensure that crypto exchanges operate transparently and securely. Despite permitting crypto exchanges, Japan has made crypto laws a top priority following a number of high-profile security breaches, resulting in stricter cybersecurity and AML/CFT requirements. Japan is currently working on establishing guidelines for the Application of the "crypto Travel Rule" to Virtual Asset Service Providers (VASPs) in Japan. These measures will enhance the country's regulations and continue to provide investors with a secure environment.
Sanction Scanner provides powerful tools that can assist businesses and financial institutions in complying with Japan's cryptocurrency regulations. It offers a suite of solutions that can help businesses and financial institutions ensure compliance with AML and CTF regulations when dealing with cryptocurrencies.
One of Sanction Scanner's key features is its screening capabilities, which allow businesses and financial institutions to check their customers and partners against global watchlists, including Japan's list of designated terrorist organizations and individuals. This screening helps to ensure that businesses and financial institutions are not inadvertently facilitating financial transactions with individuals or organizations that are subject to sanctions or other restrictions.
Sanction Scanner also offers transaction monitoring capabilities, which allow businesses and financial institutions to track cryptocurrency transactions and detect suspicious activity. This feature can help companies comply with Japan's record-keeping requirements and report any suspicious transactions to the appropriate authorities.
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