Japan’s Government has long been working on a bill to amend its Banking Act, accounting for changes to the economy stemming from the growth of telecommunications technologies. Last week, the Japanese Financial Services Agency (FSA) announced that this bill will come into full force on Saturday, April 1. The amendments include an ordinance concerning digital currencies as well as digital currency exchanges.
According to the world’s largest bitcoin exchange by volume, Bitflyer, “Section 3 of this bill now includes wording on virtual currency [VC] and is being tentatively called the ‘Virtual Currency Act’." It defines digital currencies including Bitcoin for the first time and recognizes them as a method of payment.
“The new law defines Bitcoin and other virtual currency as a form of payment method, not a legally-recognized currency. Bitcoin will continue to be treated as an asset unless there are future revisions or directives to Japanese tax law.”
According to global law firm DLA Piper, the amended Payment Services Act, which is part of the Banking Act, defines a digital currency as “property of value,” that is usable for payment to unspecified persons, and is purchasable from and sellable to unspecified persons.
The law firm explains how the act explicitly distinguishes digital currency from both traditional currency as well as electronic money. According to Japan, ‘digital currency’ is not the same as ‘electronic money’ because the former has no issuers and is usable by any accepting individual, whereas the latter has a specific issuer and is only usable by the issuer or authorized persons.
Profits from bitcoin trading can be considered “income from business activities or miscellaneous income.” The asset-like nature of Bitcoin means that it is also subject to capital gains tax in Japan. However, the purchase and sale of bitcoins and other digital currencies will no longer be subject to Japan’s 8 percent consumption tax, starting from July 1.
This new regulation is the result of a seperate effort by the Japanese government to reform its tax bills. The proposals for the 2017 fiscal year tax reform approved by Japan’s Cabinet on March 27 include an exemption from consumption tax for the transfer of digital currencies, effective on July 1.
DLA Piper explains that “the taxation of virtual currencies is undergoing many developments in Japan,” and new accounting standards detailing the treatment of digital currencies for tax purposes are “anticipated in the near future.”
“While VC-cash exchanges would be exempt from consumption tax, the exchange of virtual currency for assets or services (i.e., when someone pays virtual currency to a seller of assets or services) is still subject to consumption tax in the same way as those transactions which are paid in traditional currency.”
- DLA Piper Law Firm
While the sales and purchases of bitcoins is exempt from the consumption tax, opening an account at a bitcoin exchange is getting more difficult. The April 1 bill also revises the ‘Act on Prevention of Transfer of Criminal Proceeds’ which requires exchanges to implement a stricter know your customer (KYC) process. Since the announcement that this law would go into effect on April 1, major bitcoin exchanges have rushed to inform their customers of upcoming new KYC procedures.
Customers now have to answer a list of questions not previously asked at Japanese bitcoin exchanges, such as the customer’s profession and purpose for trading. They must also upload identification documents and wait for the exchanges to process them, which can take a few days. Also, the exchanges will be sending a postcard to the registered address of new customers, with a verification code that needs to be entered online before the account can be used.
Meanwhile, digital currency exchanges themselves have to comply with several added regulatory requirements. The most restrictive among them is a requirement to hold, at minimum, liquid capital of ¥10 million yen, worth approximately US$90,000. In addition, exchanges have to prove that they possess a sufficient IT system management program, with measures in place to prevent leakage, loss and damage of funds and personal information.
Further, each exchange must also disclose detailed information to their users, including their trading name and address, registration number, transaction content, as well as disclose all fees and costs to users. They must then establish an internal system for employee training and guidance for outsourcees. They must also segregate user's cash and digital currencies from their own funds, as well as undergo a regular audit of the status of the segregated management by a public certified accountant or audit firm at least once a year.
The Payment Services Act also introduces regulations “for the registration of all virtual currency exchange businesses,” DLA Piper explains, citing how this regulation is “consistent with the declaration made at the 41st G7 Summit at Elmau in 2015.”
“Currently, most Bitcoin-cash exchange services available in Japan are operated by Japanese companies. However, the amendment to the Act could be an opportunity for foreign VC-cash exchange service providers to expand their business into Japan, because the new registration system is also open to foreign entities.”
- DLA Piper Law Firm
The land of the rising sun has a unique history with Bitcoin that was complicated by the 2013 rise and fall of the world’s leading bitcoin exchange at the time, Tokyo’s MtGox. Although Japan’s large population is very advanced technologically and is already used to sending tokens and coupons between their smartphones, most Japanese had still not heard of Bitcoin until the MtGox fiasco. Many were introduced to Bitcoin by seeing Mark Karpeles’ face on TV at courtroom trials.
“The Japanese people had a terrible image toward bitcoin, thinking that Mt. Gox WAS Bitcoin!,” explains Kagayaki Kawabata, Coincheck Business Development Lead. “However, the situation has changed in the past few years. Today, the amount of Japanese citizens who think of bitcoin as superior technology is increasing.”
“The Japanese bitcoin market is changing rapidly and is now moving in a positive direction,” Kawabata explained to BraveNewCoin. Exchanges offering trades in Yen currently account for more than half of global bitcoin trading volumes.
The Japanese conglomerate GMO has already started taking advantage of the new atmosphere. The largest Internet Service Provider and online forex market provider has an investment in the largest bitcoin exchange, Bitflyer, and is developing an upcoming Bitcoin exchange and wallet service. The company estimates that the Japanese market for digital currencies will grow to ¥1 trillion, or US$8.7 billion in a few years, the company cited that their reason for the high appraisal and their investment in the space is the recent improvement in the Japanese regulatory environment.