JAPAN: An Introduction to FinTech Legal

The Japanese economy is gradually overcoming a prolonged deflationary period, and the Nikkei Stock Average is reaching new highs, leading to a re-evaluation of the Japanese stock market both domestically and internationally. In this context, the Japanese government has set a goal of enhancing the overall productivity of the economy and of transitioning the Japanese economy to a “new growth-oriented economic phase” by concentrating resources such as human capital and financial capital into growth sectors like digital technology, science and innovation.

Web3

The growth of the web3 industry is included in this goal. Recently, the ruling Liberal Democratic Party's web3 Project Team (“web 3 PT”) has compiled a white paper (the “Web3 White Paper”) that contains a comprehensive set of recommendations to promote the web3 industry, including regulatory reforms and tax reforms.

In response to the Web3 White Paper, several remarkable improvements were made in the fintech-related business environment in Japan in 2023 and 2024. This includes an amendment to the Limited Partnership Act, the exclusion from companies’ tax bases of some types of crypto-asset and the relaxation of trading platform regulations.

Amendment to the Limited Partnership Act

In the context of investment in web3 companies, it has been observed that investments are made in tokens that qualify as “crypto-assets” under the Payment Services Act, alongside stocks. However, in Japan, limited partnerships (LPS), which are commonly used as investment vehicles for venture companies, were legally unable to acquire and hold crypto-assets. This was identified as an obstacle to the fundraising efforts of Japanese web3 companies. Therefore, with the amendment in 2024, an LP will be allowed to acquire and hold crypto-assets issued for domestic businesses.

Exclusion of certain “market crypto-assets” from valuation for taxation

In respect of corporate tax, corporations holding crypto-assets with an active market (“market crypto-assets”) at the end of a fiscal year are, in principle, required to obtain a market valuation for such assets and include the difference between the market valuation and book value in their profit and loss accounts. This year-end market valuation taxation on corporations applies to unrealised gains, regardless of the purpose for which the crypto-assets are held. This has been a significant burden on crypto-asset-related businesses. To a certain extent, tax reforms implemented in 2023 and 2024 for the purpose of relaxing the year-end valuation taxation have alleviated this tax burden on corporations. Under the tax reforms, crypto-assets issued by a corporation that have been continuously held by that corporation itself since their issuance are excluded from market valuation taxation. Additionally, market crypto-assets (other than self-issued crypto-assets) that are subject to transfer restrictions or other conditions can be excluded from market valuation taxation.

Alleviation of proprietary trading system-related regulations

In Japan, previously, it was not permitted to handle unlisted securities on a proprietary trading system (PTS) operated by a securities company as a trading platform for securities. This was considered one of the reasons for the lack of funding for start-ups. Regarding this point, regulatory reforms from 2023 to 2024 have allowed PTSs to handle (i) tokenised securities such as stocks and corporate bonds, and (ii) unlisted stocks and investment trusts that are securities for specific investors, among other regulatory relaxations.

Stablecoins Distinguished From Other Crypto-Assets by the JFSA

In addition to the web3 PT’s initiative, the Japan Financial Services Agency (JFSA) introduced new legislation regarding stablecoins in 2023, with the aim of clarifying and introducing regulations on the distribution of electronic payment instruments (ie, stablecoins). Under the regulatory framework of Japan, stablecoins that can be redeemable in fiat currencies have been distinguished from crypto-assets, regardless of whether a specific stablecoin is blockchain-based or not. Currently, many foreign and domestic stablecoin-related business players are working to obtain the necessary licences or endorsements from the JFSA to circulate stablecoins in Japan, under the new legislation.

Additional Reforms

There are a number of other anticipated amendments to fintech-related regulations which are worth paying attention to. In September 2024, the JFSA established a Working Group on Payment Services Systems, etc. under its Financial Systems Council, for the purpose of examining, among other things, the necessity of reforms related to remittance, payment, and credit services. As part of the specific issues being considered for systemic reform, a variety of points have been raised, including the following:

• the introduction of regulations on cross-border payment collection services (there is a possibility that overseas businesses, which have effectively operated without regulation until now, will be required to register as money transfer service providers);
• whether the so-called advance payment services (including BNPL services) fall under the category of money lending or money transfer services; and
• the exemption of foreign banks without a domestic base from the requirement to register as money lenders when participating in syndicated loans arranged in Japan.

Possible tax cuts for crypto

Regarding the tax system, the income tax on individual crypto-assets transactions is progressive, and when combined with the residence tax, a maximum tax rate of 55% on profits is imposed. This has been one of the factors deterring Japanese citizens from investing in cryptocurrencies. On the other hand, following the realisation of Bitcoin ETFs and Ethereum ETFs in the United States, discussions around the realisation of crypto-asset ETFs in Japan have become more animated. If crypto-asset ETFs are realised, it is expected that the applicable tax rate will be a flat 20% separate taxation, similar to stock transactions. Therefore, from the perspective of tax fairness, there is a debate over whether the tax rate for spot crypto-assets transactions should also be set at the same level. Although there are some who argue for caution about any reduction in the tax rate, and the hurdles to such a reduction remain high, if crypto-asset ETFs and tax rate reductions are realised, it is anticipated that crypto-asset transactions by institutional and individual investors within Japan will become more common.