1.    Global context

As noted in the IMF’s “Virtual Currencies and Beyond: Initial Considerations” report released in January 2016: 

“[Virtual currencies (VCs)] offer many potential benefits, including greater speed and efficiency in making payments and transfers – particularly across borders – and ultimately promoting financial inclusion… At the same time, VCs pose considerable risks as potential vehicles for money laundering, terrorist financing, tax evasion and fraud.”

Regulators around the world have begun to focus on this issue and responses have varied.  In this global context, the Japanese cabinet recently approved a set of Bills to regulate digital currencies in Japan and they were submitted to Parliament on March 4, 2016. 

2.    Regulatory framework

The Bills were submitted together with a number of other fintech related Bills, the aim of which is to promote Tokyo’s greater involvement in the burgeoning fintech market.  The Bills regulate digital currencies by prescribing licensing requirements for digital currency exchanges.  The existing framework for know-your-customer (KYC), anti-money laundering (AML) and counter terrorism financing (CTF) laws and regulations will also apply to such exchanges.

3.    Customer protection

Digital currency exchanges will be regulated by Japan’s primary financial regulator, the Financial Services Agency (JFSA).  In addition to complying with Japan’s KYC/AML/CTF regulations, to ensure robust consumer protection, operators of digital currency exchanges will also have to:

  • provide information to customers about the risks, etc of transacting in digital currencies;
  • implement personal information protection measures;
  • segregate client assets/deposits;
  • prepare financial statements; and 
  • be subject to JFSA audit.

4.    Opportunities

This new regulatory framework will provide clarity for those wishing to enter into the Japanese digital currency market by streamlining the licensing process.  This should help digital currency focused start-ups expand into/scale up in Japan with certainty regarding regulatory risks. 

5.    Expert panel

The JFSA has also announced the establishment of a panel of fintech experts to improve communication and collaboration between the regulator and industry participants.  This move has been welcomed by market observers as the ability of regulators to keep up with technological developments and innovation has been seen as a key challenge to the development of a thriving fintech start-up scene in Japan.

6.    Next steps

These developments demonstrate the Japanese Government’s willingness to embrace innovation and be a leader when it comes to facilitating the introduction of technology to improve customer choice, whilst maintaining the stability of the financial markets. Japan will host the G7 Ise-Shima Summit in May 2016 and will take this opportunity to advance discussions on innovation, big data, cyber-security, financial regulation and international cooperation.  It is expected that the digital currency Bills will be passed by Parliament shortly thereafter. 

Contributor: Masato Honma