Japan: A Banking & Finance: Domestic Overview

Collateral Assignment Rights, Crypto-Asset Regulation, and Further Developments in AML/CFT Frameworks

The financial industries are facing new changes in transaction practices and regulatory frameworks raised by recent legal developments. This article introduces the key legal developments which are gaining attention in financial sectors.

Enactment of laws concerning collateral assignment agreements and title retention agreements

Although, in conventional Japanese debt-financing practice, collateral assignment transactions utilising movable property or receivables held by the debtor as collateral have been widely used, as Japanese law lacks explicit statutory provisions, the legal relationships pertaining to collateral assignment transactions have been governed by accumulated case law principles. To ensure legal clarity through legislation and to amend existing rules governing collateral assignment transactions, the “Act on Collateral Assignment Agreements and Title Retention Agreements” (the “Collateral Assignment Act”) was promulgated on 6 June 2025 and is expected to be implemented by the end of 2027 at the latest.

This section briefly discusses key aspects that are expected to impact existing practices of collateral assignment transactions, particularly for financial institutions looking to enter such transactions.

Allowing the establishment of multiple collateral assignment rights

In conventional collateral assignment transactions, the establishment of a collateral assignment right was commonly interpreted as a transfer of ownership of the collateral and, therefore, it was not always clear whether the establishment of multiple collateral assignment rights was legally possible. However, the Collateral Assignment Act explicitly states that multiple collateral assignment rights can be established concurrently.

This enables, for example, the establishment of each collateral assignment right at the same rank for multiple lenders in syndicated loans and, in addition, it is expected that collateral assignment can now be utilised as a means to secure mezzanine loans, expanding the cases where collateral assignment rights can be used.

Relaxation of specificity requirements for pooled movable assets subject to collateral assignment rights over a pool of movable assets

Collateral assignment transactions of pooled movable assets usually require that the type of movable assets in question and the location of their storage be identified, but precisely identifying the scope of assets such as inventory, which fluctuate daily, is typically difficult. The Collateral Assignment Act does not require the location of the movable assets covered to be specified; instead, the scope can be defined as “other matters”, enabling the security interest to automatically extend to movable assets belonging to the collateral assignor in the future. That said, it is not entirely clear what precisely is meant by “other matters” as an identification method and, therefore, it is hoped that this will be clarified through accumulated practical experience going forward.

Subordination of perfection against third parties via constructive delivery (senyu kaitei)

As with conventional collateral assignment transactions, the Collateral Assignment Act stipulates that the perfection (ie, the process of making a security interest publicly cognisable and binding on third parties) of movable collateral assignment rights is made by delivery (or, in the case of movables requiring registration, registration), but delivery by constructive delivery (senyu kaitei – ie, non-physical transfer of possession) is expressly subordinated to collateral assignment rights that have been perfected by other means. This is based on the principle of prioritising collateral assignees who have carried out the perfection through registration that offers greater publicity even in relation to third parties, rather than relying solely on constructive delivery which is clear only between the collateral assignor and collateral assignee.

For financial institutions intending to establish a collateral assignment right, the benefits are significant: reducing the burden of investigating the existence of prior constructive delivery with insufficient publicity and mitigating the risk of subordination in priority ranking of collateral assignment rights arising from the existence of such prior constructive delivery.

Recent discussions regarding regulatory framework for crypto-assets

As of March 2025, the number of crypto-asset accounts opened exceeded 12 million, with user deposits reaching approximately JPY5 trillion. Investments into crypto-assets by investors have expanded significantly and, given the current situation where crypto-assets are no longer positioned merely as a means of payment but as investment assets, discussions have been underway to review legal frameworks relating to crypto-assets so that investment in them can contribute to the public’s asset formation.

The Financial Services Agency in Japan (the FSA) published a discussion paper titled “Review of the Framework for Crypto-Asset-Related Systems” (the “Discussion Paper”) on 10 April 2025. The Discussion Paper proposes a review of regulations on crypto-assets from the perspective of investor protection, given the increasing number of fraudulent investment solicitations related to crypto-assets as discussed above, and also from the perspective of maintaining the competitiveness of domestic Web3 businesses. Specifically, focusing on both the nature of crypto-assets and actual trading practices, the Discussion Paper classifies crypto-assets into two types:

1. those issued as a means of raising funds where the raised capital is used for business activities (“Type 1”); and
2. all others (“Type 2”).

Proposals include:

1. establishing information disclosure regulations for issuers of Type 1 crypto-assets and information explanation regulations for crypto-asset exchange service providers of Type 2 crypto-assets;
2. relaxing licence requirements depending on the type of crypto-asset and strengthening enforcement against unregistered crypto-asset exchange service providers; and
3. establishing insider trading regulations applicable to crypto-asset transactions.

Given that crypto-assets are treated as investment targets, the intent of the proposals is considered to introduce regulations for crypto-assets based on the Financial Instruments and Exchange Act, separate from the Payment Services Act which focuses on regulating settlement functions.

Discussions are currently underway within the working group related to the crypto-asset system to amend laws based on the content of the Discussion Paper, and future developments are being closely watched.

Progress in AML/CFT frameworks

It has been over a year and a half since March 2024, the deadline for developing AML/CFT frameworks as stipulated by the “Guidelines for Anti-Money Laundering and Combating the Financing of Terrorism” and the FSA’s guidance and supervision of financial institutions relating to AML/CFT frameworks have now moved to a phase where, assuming such frameworks are in place, each institution is being encouraged to verify their effectiveness.

The FSA published a discussion paper titled “Issues and Practices for Dialogue on Validation of Effectiveness of AML/CFT Frameworks” on 31 March 2025. This discussion paper presents details that should be evaluated, along with concrete examples, to promote efforts by each financial institution to continuously verify that its AML/CFT frameworks are functioning effectively, and identifies three evaluation perspectives:

1. evaluation related to risk identification and assessment;
2. evaluation related to risk mitigation measures; and
3. timely effectiveness evaluation.

The FSA has made it clear that it will henceforth confirm the appropriateness of identifying, assessing, and mitigating risks such as money laundering through dialogue with financial institutions. Furthermore, in the Financial Action Task Force’s (FATF’s) 5th Round of Mutual Evaluations scheduled for August 2028, interviews with some financial institutions are expected to be conducted by the evaluators, primarily regarding the effectiveness of the financial institutions’ supervision and preventive measures and, therefore, it is becoming increasingly important that financial institutions maintain their AML/CFT frameworks as voluntary measures and are able to demonstrate their effectiveness externally.

Moreover, from the perspective of customer identification as part of AML/CFT frameworks, it is also worth noting the amendment to the Regulations for Enforcement of the Act on Prevention of Transfer of Criminal Proceeds, the purpose of which is to tighten the methods for verifying personal identification details. This comes against the backdrop of the proliferation of non-face-to-face transactions and the increasing ease of forging identification documents due to advances in photo editing technology, which has heightened concerns about fraudulent use of financial services. The revised regulations are expected to take effect on 1 April 2027 and financial institutions will need to rebuild their systems for verifying the authenticity of identity documents.