Japan’s new legislation defining and recognising virtual currencies not only offers a sound model for others – it’s already paying dividends in a rapidly growing fiscal frontier, writes Niels Vandezande.
Over the last few years, the Japanese government has spent a lot of time thinking about how to handle virtual currencies, and particularly cryptocurrencies like Bitcoin. Back in 2014, Cabinet decided that virtual currencies weren’t actual currencies or bonds, thus putting them outside the scope of financial law.
While citizens’ use of virtual currencies wasn’t illegal, it prevented financial institutions from dealing in them. Even though Cabinet did not immediately seek to regulate virtual currencies, it did support the establishment of a self-regulatory body, the Japan Authority of Digital Assets. This all changed on 1 April this year, when new legislation regulating virtual currencies first proposed by Japan’s Financial Services Agency entered into force.
The new law amends Japan’s Payment Services Act by defining virtual currencies as stores of value used as means of payment between unspecified parties, and which are transferable electronically. Importantly, this provision recognises virtual currencies as a legitimate means of payment but falls short of acknowledging them as legal tender. As such, parties can decide to accept virtual currencies in mutual transactions but aren’t obliged to do so.
The amended Payment Services Act also targets virtual currency exchanges. These entities are now required to register, and to comply with a range of operational requirements, including cybersecurity measures. Moreover, they are subjected to supervision and are bound by anti-money laundering rules.
Additionally, it is now proposed to exempt virtual currency exchange transactions from Japan’s consumption tax. This puts the taxation of these kind of transactions in line with Europe, where a 2015 decision by the Court of Justice of the European Union similarly exempted such transactions from VAT.
There are, however, a few uncertainties in the new legal framework. First, the Payment Services Act mainly regulates prepaid instruments, such as gift certificates and pre-purchased cards. Given the broad definition of virtual currencies, it is uncertain whether prepaid tokens – such as those in online games used by messaging app Line – could fall under the scope of these obligations. However, on 6 April the Kanto Local Financial Bureau raided the offices of Line as part of an investigation into the use of prepaid tokens.
Second, the absence of accounting standards for virtual currencies could pose problems. If companies do not know how to deal with the fluctuating value of many virtual currencies, they could confront sudden losses. One possible solution is to consider virtual currencies the same way as reward points, where provisions can be made against future redemptions.
Overall, Japan’s effort is a laudable attempt at regulating virtual currencies. On the one hand, it provides a clear definition of virtual currencies rather than trying to apply existing interpretations.
At the same time, it includes virtual currencies in a well-established legal framework. Prepaid service providers that do not deal in virtual currencies are already caught under the scope of this framework, so it stands to reason that similar services – that just happen to revolve around virtual currencies – would be placed under the same set of rules. The new legislation offers legitimacy to virtual currencies, but also clearly sets them apart from regular currencies, and thus avoids other legal frameworks, such as those imposed on money lending.
While some issues still need to be resolved, the new legislation will likely serve as a point of inspiration for other legislators. In the EU, for instance, legislation is currently being considered to put certain virtual currency service providers – particularly virtual currency exchanges and custodian wallet providers – under the scope of the anti-money laundering framework. Moreover, the European Banking Authority has expressed interest in exploring how virtual currencies could be placed under the EU’s Payment Services Directive, though it fears that more substantive amendments would be required to make this possible.
From a practical point of view, Japan’s new legislation may already be showing its effect. The use of virtual currencies is rising in Japan, and currently, the Japanese Yen is the most traded national currency for bitcoin.