Japan regulator proposes crypto rule overhaul in line with securities law

Japan’s Financial Services Agency (FSA) presented a proposal that would significantly tighten crypto regulation.

A Tuesday FSA report recommends regulating cryptocurrencies under the Financial Instruments and Exchange Act (FIEA), moving them from under the Payment Services Act. This aims to strengthen investor protection and align crypto oversight with securities regulation.

The regulator said that many issues within crypto resemble those traditionally addressed under the FIEA, so it may be appropriate to apply similar mechanisms and enforcement.

Key problems in crypto investment highlighted in the report include unclear white papers, inaccurate disclosures, unregistered operations, investment scams, low risk tolerances and security concerns within exchanges.

A rough translation of the report said:

“So it may be appropriate to address them (crypto assets) using the mechanisms and enforcement of the Financial Instruments and Exchange Act.”

The report is not legally binding; it is an internal briefing document prepared by the FSA secretariat to present ideas to the Financial System Council. The council is a formal advisory body to Japan’s Financial Services minister, and the government will then decide whether new rules are needed.

Japan’s Kasumigaseki Common Gate, headquarters of the Financial Services Agency. Source: WikimediaRelated: Crypto Biz: Japan’s quiet stablecoin coup

Crypto is on the rise in Japan

The report notes that crypto is playing an increasingly important role in Japan’s economy, with the total number of accounts opened at domestic cryptocurrency exchanges exceeding 12 million and the balance of user deposits reaching over 5 trillion yen ($33.7 billion). This is almost equivalent to one crypto exchange account for every 10 people.

Still, it highlighted that small-scale trading is dominant in Japan, with more than 80% of individual accounts holding less than $675.

The FSA also noted that 7.3% of those with investment experience hold crypto, more than those trading FX or holding corporate bonds. About 70% of Japanese crypto holders are middle-income earners, and 86% of users trade with the expectation of long-term price increases.

The FSA’s report follows Japan’s Finance Minister Katsunobu Kato’s recent recognition that cryptocurrencies deserve a place in diversified investment portfolios. “While crypto assets carry the risk of high volatility, by establishing a proper investment environment, they can become an option for diversified investment,” he said in late August.

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Tighter rules for crypto

Under the FIEA, crypto is already treated as a financial instrument when used as an underlying asset for derivatives.

Applying the Financial Instruments and Exchange Act in totality would impose disclosure requirements on crypto issuers of securities regarding public offerings and secondary distributions. This, the FSA said, would “eliminate the information asymmetry between issuers and investors.”

FIEA rules would also regulate intermediation and brokerages for buying and selling. They would also enforce rules against unfair trading and provide enforcement measures, including emergency injunctions against unregistered businesses.

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