Japan's Significant Transition: Shifting Crypto Governance from Payments to Securities Law

Japan's financial authorities are gearing up to transition the oversight of cryptocurrency assets from the nation's payment system to a framework centered around investment and securities.

Key Takeaways

Japan's financial regulators are shifting cryptocurrency oversight from the Payment Services Act to the Financial Instruments and Exchange Act.
This shift aims to enhance user protection by treating crypto assets as financial products.
The proposed framework includes stricter data disclosure requirements for initial exchange offerings (IEOs).
It will empower regulators to combat unregistered platforms and prohibit insider trading.
The Japanese government is also considering a tax reduction on crypto profits to a flat rate of 20%.

Japan's Significant Transition: Shifting Crypto Governance from Payments to Securities Law

Recently, the Financial Services Agency (FSA) released an extensive report from the Financial System Council's Working Group, which examined the regulatory landscape for cryptocurrencies across various sectors.

The report sets forth a plan to move the legal foundation for crypto regulation from the Payment Services Act (PSA) to the Financial Instruments and Exchange Act (FIEA). The FIEA is the principal legislation governing securities markets, including aspects of issuance, trading, and disclosures.

“Crypto assets are increasingly being utilized as investment vehicles, both domestically and internationally,” the report emphasizes, highlighting the necessity to protect users by adopting regulations that classify crypto as a financial product.

Enhancing Data Disclosure Regulations

One of the main transformations under the FIEA is the enhancement of data disclosure requirements for initial exchange offerings (IEOs) or token sales conducted by cryptocurrency exchanges.

The document states, “Crypto transactions executed by users resemble securities transactions and might involve sales of new crypto assets or trading of those already available in the market.” This underscores the importance of timely information sharing during IEO sales.

Source: FSA Japan

The proposed regulations will require exchanges to provide pre-sale disclosures, which must include in-depth information about the organizations behind the offerings. Furthermore, independent third-party experts will need to conduct code audits, and exchanges are encouraged to consider feedback from self-regulatory organizations.

Beyond exchanges, issuers will also bear responsibilities, as they are required to disclose their identities regardless of whether the project is decentralized, along with details on how tokens are issued and distributed.

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The new framework will empower regulators with stronger tools to target unregistered platforms, especially those operating from abroad or linked to decentralized exchanges. Moreover, it explicitly prohibits insider trading, mirroring provisions found in the European Union’s Markets in Crypto-Assets (MiCA) framework and regulations in South Korea.

This development arises as the Japanese government debates a reduction in the maximum tax rate on crypto profits, proposing a flat rate of 20% on all gains from cryptocurrency trading.

On another front, the FSA has expressed a cautious outlook regarding the approval of derivatives for foreign crypto asset exchange-traded funds, referring to the underlying assets as “not desirable.”

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