Revised Crypto Laws in Japan to be Enforced Starting May 1

New laws for regulating cryptocurrencies in Japan will start to be enforced next month.

The Payment Services Act (PSA) and Financial Instruments and Exchange Act (FIEA), two of the pieces of legislation passed by the Japanese House of Representatives last year to regulate crypto, were scheduled to come into effect starting in April. However, with unexpected delays, no enforcement date had officially been set until last week.

In the April 3 edition of an official government newsletter, it was announced that the revised versions of the PSA and FIEA would be enforced in Japan starting on May 1.

Changes to Payment Services Act in Japan 

As there are no official laws to regulate crypto in Japan, amending existing regulations is the only way at this time for digital assets to have any kind of legal status in the Asian nation. As such, changes to the PSA range from changing basic terminology — “crypto asset” instead of “virtual currency” — to tightening restrictions on crypto custodians.

In addition, crypto exchanges operating in Japan from May 1 will have to manage users’ money separately from their own cash flows. This means finding a third-party operator to keep hold of their clients’ money, and using “reliable methods” like cold wallets to do so. 

If users insist on using hot wallets, exchanges would have to hold “the same kind and the same quantities of crypto assets” as their users to properly reimburse them in the event of theft — this was possibly added in response to the Mt. Gox hack which resulted in the loss of 850,000 Bitcoin.

Changes to the Financial Instruments and Exchange Act 

Revisions to the FIEA include the concept of electronically recorded transferable rights (ERTRs) to define that initial coin offerings (ICOs) and security token offerings (STOs) would be regulated under the act. ERTRs refer to tokens issued in the expectations of profits — i.e. security tokens. In addition, crypto derivatives are largely unregulated in Japan despite them being 80% of existing trades. From May 1 onward, crypto asset derivatives transactions will be regulated under the FIEA. 

In general, the FIEA prohibits anyone in Japan from engaging in activities such as dissemination of rumors, or the use of fraudulent means to sell, purchase, or engage in any crypto asset or derivatives transaction.

A recent report by a Tokyo-based law firm concluded that regulatory measures like the PSA and FIEA may help make Japan stand out as a safe haven for crypto, rather than the wild west of finance that it’s sometimes known for.