Japan’s Crypto Regulations and its impact on Crypto Space
Japan is a country synonymous with technology whether we are referring to its booming tech companies such Toshiba, Softbank and NEC or its massive growth in robotics technology. Japan is also leading the way in terms of blockchain technology and the adoption of cryptocurrency as more than 2 million Japanese people are crypto owners. With a booming adoption in the country, let’s take a look at Crypto Regulations in Japan for 2022 and how it could affect this space?
Japan’s Crypto Regulations for 2022
From being the one of the first nations to implement negative interest rates to strengthen its economy and successfully organizing the Olympic Games in the midst of a major pandemic, Japan has continuously weathered challenges in the country. Cryptocurrency space has presented a new challenge for the Land of the Rising Sun in building a regulation to oversee the space while not deterring its potential.
Japan has begun addressing the crypto space with its 2017 regulations being the first to introduce a legal definition of “virtual currency” (in the Payment Services Act). But although it is legal, it also is not considered to be the same with fiat currency or deemed to be money and the Bank of Japan (BOJ) neither supports nor prohibits the use of crypto-assets. This puts Crypto in an ambiguous situation as Japan is the pioneer to allow crypto to be used as payment method but it doesn’t recognize it as legal tender.
Japan has also recently pioneered the idea of crypto travel rule which will be implemented within the country through self-regulatory rules enacted by the Japan Virtual Currency Exchange Association (JVCEA) — a self-regulated entity responsible for creating rules and policies applicable to cryptocurrency exchanges in Japan. This is expected to provide an additional layer of security from the traditional AML/KYC procedure that is already implemented in every virtual asset service provider.
This travel rule requires virtual asset service providers (VASPs), like Japan’s crypto exchanges, to share customer data on transactions above a certain threshold. This means that VASPs in Japan will send identifiable information of these users to each other but won’t have to send user data to the regulator. This will in turn makes it easier to identify suspicious transactions related to money laundering and terrorist funding.
This is also not the only regulation coming to Japan’s crypto space in 2022 as the top banking regulator within the country is looking to emulate the United States to introduce new legislation that will limit the issuance of stablecoins to banks and wire transfer companies. The regulations that will be proposed by Japan’s Financial Services Agency (FSA) are an effort to tighten the agency’s grip on Stablecoin Market to protect its users from the Tether reserve’s controversy.
These two regulations might seek to strengthen the security of crypto space in Japan but its tax laws are pushing people’s interest away from it. The tax laws exempt taxes on buying, holding or moving it between wallets but it does charge you on the gains that you earn by selling them. Those gains are considered as miscellaneous income and Japanese crypto investors could pay a maximum of 55% tax on crypto depending on the tax bracket they fall in. With this being implemented from the end of 2021, it will clearly show its impact on the fiscal year of 2022. The problem lies is will these regulations stimulate or wilter the crypto space?
Impacts on the Crypto Space
The Crypto Space and regulators should go hand in hand as any system that is left unattended without regulations in place will result in scams or excessive speculations which are what we see now in the space but the regulations also should not restrict its potential. It is clear that by all the regulations that Japan is looking to embrace the potential of cryptocurrency and doing so with security at the top of its priority.
Japan’s decision to allow crypto to be used as a legal payment method has been an incredible move that allows more than 4500 stores to add Bitcoin to their payment method but also allows these stores to adapt and capitalize on the new crypto enthusiasm therefore boosting their sales and revenue. It also has managed to double the amount of crypto holders and its transactions from the year before.
Learning from Tether’s reserve controversy, Japan’s Stablecoin Issuance regulations might not seem to be a bad idea at first as it seeks to eliminate stablecoin that claims to be backed by a fiat currency but does not have the transparency or sufficient cash reserve to support it. As stablecoin forms the bridge between decentralized and traditional finance space, these regulations will also allow regulators to securely assess its reserve and maintain the stablecoin from being undercollateralized.
Despite all of these gains, its crypto tax law needs to be revisited as paying 55% of your gains clearly is driving interest away from the space. Although you may argue that most people won’t qualify for the 55% threshold it is still significantly higher from 20% that is levied on stocks. These taxes would also discourage business and entrepreneurs who want to dip their toes and advance in the Web 3.0 space.
“Web 3, blockchain and crypto [are] going to be the next big movement, we’re going to lose if we don’t change the law on tax.” Said Ken Watanabe, task force member of the Trusted Web Promotion Council.
Lastly the Travel Rule might be a good idea in promoting security within crypto space but it also undermines the concept on which blockchain is built upon, which is privacy. Not only that, sharing data between VASP’s requires a lot of compliance costs and framework that have to be incurred by the institutions. In analysing all the above, Japan might have the right idea going forward but it clearly needs the right framework to support it. 2022 should not only see the impact of these regulations but it would also highlight the improvements that can be resolved.
We in Nagaya Technologies Pte. Ltd believe that regulations would provide the framework that the Crypto space needs. Which is why we aim to provide transparency and legality that will establish a clear idea regarding Nagaya to our users and regulators. For more information regarding the latest updates on Nagaya and our whitepaper, you can visit us at nagaya.io or join our Official telegram channel at t.me/nagayaofficial
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