Japan’s Financial Services Agency (FSA) has put forth a significant regulatory overhaul that could put cryptocurrencies under the Financial Instruments and Exchange Act (FIEA) and out of the Payment Services Act.
In a report released by the FSA, they stated that many challenges in the crypto space, such as false disclosures, unregistered businesses, scams, and low standards of security, have hallmarks that are more in line with historical issues addressed through securities laws.
The FSA seeks to apply the FIEA to crypto assets to improve investor protection, limit fraud, and implement better compliance standards in one of Asia’s fastest-growing digital markets.
Crypto’s Growing Role in Japan’s Economy
The FSA’s report noted the rapid uptake of cryptocurrency in Japan, where 12 million accounts have been opened with domestic exchanges.
User deposits total over 5 trillion yen (or $33.7billion), which amounts to almost one crypto exchange account for every 10 people in the country.
Even with these numbers, trading activity is relatively stagnant, with 80%+ of individual accounts having less than $675.
The regulator also noted 7.3% of investors have some crypto exposure, over and above foreign exchange and corporate bonds.
Most holders are middle-income earners acting on long-run price expectations.
Finance Minister Katsunobu Kato backed this perception in August, suggesting that the crypto market could evolve into a legitimized asset class used for diversified portfolios, if adequately regulated.
Also Read: Chainlink and Japan’s SBI Group Partner to Advance Crypto Tech Solutions Across Asia
Stronger Rules Could Reshape Market Practices
If they take up the proposal to apply the FIEA properly, cryptocurrency issuers and intermediaries in Japan will encounter much more stringent conditions.
In particular, issuers will need to make disclosures that are precisely like the disclosures made with securities, which would mitigate information asymmetry between project teams and retail investors.
On the whole, brokerages and exchanges will not only undergo greater regulation, but they will also be under stricter regulation in terms of fair trading and compliance.
The FSA also made clear that it could use its enforcement tools (including emergency injunctions) against unregistered businesses, which would be a significant increase in oversight.
For the time being, the FIEA already treats crypto as a financial instrument when it’s leveraged as derivatives, but applying the FIEA as a whole would provide a much more similar environment to securities for the crypto market generally.
Japan’s Broader Digital Finance Push
The shift toward stricter crypto regulations came during a wide variety of other financial innovation efforts in Japan.
On August 18, the FSA announced it could approve the nation’s first yen-backed stablecoin.
JPYC will issue the stablecoin later in 2023, and deposits and government bonds will fully back it, UnoCrypto reported.
Only weeks later, on September 1st, we reported that Japan Post Bank announced it would issue a digital currency, DCJPY, by 2026, that allows you to deposit yen, which can then be converted on a blockchain-based token at a 1:1 ratio.
These concurrent developments demonstrate Japan’s desire to address investor protection while also allowing innovations in digital assets, currencies, and payments.
If adopted, the FSA’s proposed treatment of crypto assets would establish a model for integration into regulated financial markets while maintaining integrity.
Also Read: Japanese Crypto Exchange Coincheck Set To Acquire French Broker Aplo Amid Global Crypto Aquisitions