Name
Global FinTech Guide
Country _ Name
Japan
SectionTitle
ICO/token sale
Body
Companies and projects have increasingly relied on the sale of digital assets, or tokens, as a means of fundraising. These tokens generally do not grant the holders an ownership interest in the issuing company or project, but may provide governance rights, access rights or other utility. This has been conducted through public sales known as initial coin offerings (ICOs), proliferation through token generation events (TGEs) or private sales, among other mechanisms.  While showing characteristics of traditional methods of fundraising, there are a range of unanswered questions related to the legal classifications of such products. As ICOs and TGEs will usually be distributed online and internationally, there is usually no single legal framework applying to such transaction, and the legal framework of each market in which the tokens may be offered or sold needs to be considered.

Introduction

Attitude of the country towards ICOs/token sales

As a result of the 2019 Financial Instruments and Exchange Act ("FIEA") amendment, if issued tokens have the characteristics of an investment, such as a right to receive a share of the issuer's future business profits, then they will be subject to the provisions of the FIEA. On the other hand, if the tokens are a means of payment or settlement, they will instead be subject to the provisions of the Payment Services Act.
The FSA is currently considering amendments to the FIEA in order to classify cryptoassets as financial instruments and to make them subject to insider trading regulations and disclosure requirements for issuers under the FIEA.

In addition, there are some downsides to ICOs. In Japan, ICOs have been found to be fraudulent and insufficient in protecting users, have unclear rights for token holders, and ethical hazards between token issuers and purchasers is likely to occur. Furthermore, there is a hurdle when ICOs in which the issuer of new cryptoassets itself conducts token sales, because the issuer must obtain registration as a Cryptoasset Exchange Service Provider. Therefore, there have been few examples of ICOs in recent years.

Initial Exchange Offering ("IEOs") have recently become a popular alternative to ICOs, in which the token issuer does not sell tokens directly to buyers, but instead outsources the sale of the issued tokens to an exchange.


Legal affairs

Presence of any explicit regulation on ICOs and the issuance of token/coins

Since the legal character of tokens and applicable laws and regulations differ depending on the classification of the token, it is necessary to determine their legal character on a case-by-case basis.
If the tokens issued by an ICO falls under the category of "cryptoassets" under the Payment Services Act, then the act of selling or exchanging these tokens for other cryptoassets in the course of trade falls under the Cryptoasset Exchange Services and is therefore subject to regulations under the Payment Services Act.
A cryptoasset is one that (a) satisfies all of the requirements in (i) through (iii) below (Item 1 Cryptoasset), or (b) one that can be mutually exchanged with an unspecified person, and satisfies the requirements in (ii) and (iii) below. However, if these tokens fall under the category of "Electronically Recorded Transferable Rights" under the FIEA, then they are not classified as "cryptoassets".
  • it can be used in relation to unspecified persons for the purpose of paying consideration for goods or services and can also be purchased from, and sold to, unspecified persons acting as counterparties;
  • has property value, which is recorded electronically, and which can be transferred by using an electronic data processing system; and
  • it does not fall under the definition of Japanese currency, foreign currency, currency-denominated assets, or electronic payment instruments.

Presence of any explicit restrictions on ICOs or the issuance, distribution and/or transfer of token/coins

N/A

Obligations and requirements to issue token/coins

If tokens issued by an ICO fall under the category of "cryptoassets", the act of selling or exchanging these tokens for other cryptoassets in the course of trade falls under the Cryptoasset Exchange Services and registration as a “Cryptoasset Exchange Service Provider” is required.
According to FSA guidelines, in the case of an IEO, if the issuer does not sell the token at all, in principle, the issuer's conduct is not considered to be a Cryptoasset Exchange Service.
To register as a Cryptoasset Exchange Service, the operator must be a stock company (kabushiki kaisha) or a Foreign Cryptoasset Exchange Service Provider, their capital must not be less than JPY 10 milllion, and the net assets must not be a negative figure. For a Cryptoasset Exchange Service Provider that manages cryptoassets, the net asset value must be at least the amount calculated by converting the Performance-Guarantee Cryptoassets into Japanese yen. “Performance-Guarantee Cryptoassets” means cryptoassets held by a Cryptoasset Exchange Service Provider as its own assets, that are the same type and volume as the cryptoassets of it users, which the Cryptoasset Exchange Service Provider manages in a "hot" wallet. A Cryptoasset Exchange Service Provider must manage its own Performance-Guarantee Cryptoassets separately from its other cryptoassets. Under the Payment Services Act, a Cryptoasset Exchange Service Provider is under the following obligations to protect its users:

  • Preparation and maintenance of account books
  • Provision of information to users
  • Security management of its system
  • Separate management of money or crypto currency deposited by users and the assets of the Crypto Currency Exchange Service Provider
  • Compliance with regulations regarding advertising and solicitation
  • Certain other prohibited acts
In addition, the provisions for prohibited acts such as unfair trading in the Financial Instruments and Exchange Act must be complied with for a Cryptoasset Exchange Service Provider.


Classification of token/coins in the jurisdiction
Tokens are generally classified according to their functions into (1) cryptoassets, (2) prepaid payment instruments, (3) funds transfer transactions, (4) points, or (5) securities.
If profits are distributed to the token holder from the token issuer's, then the tokens are, in principle, classified as securities.

If no profit distribution is made to the token holder, then whether the token is issued for consideration should be taken into account. If tokens are issued without consideration, they are likely to fall under the definition of points. However, as discussed below, even if the tokens are issued for no consideration, if they are mutually exchangeable with Item 1 Cryptoassets, then the question becomes whether they fall under the definition of cryptoassets.

If tokens are issued for consideration, are not "currency-denominated assets" and can be used in transactions with an unspecified person, and can be bought, sold, or exchanged with an unspecified person, then in principle they would fall under the definition of cryptoassets. However, if they can only be used for settlement against a specific person such as member store, then they are likely to fall under the definition of prepaid payment instruments.

In contrast, if the tokens are "currency-denominated assets" and are not cash-refundable, they are likely to fall under the definition of prepaid payment instruments. But if they are cash-refundable, they are likely to fall under the definition of funds transfer transactions.

A prepaid payment instrument means one which satisfies following requirements: (i) the property value, such as the amount of money, is recorded in certificates, electronic devices, or other items (“Certificates”); (ii) Certificates or numbers, markings, or other signs issued in exchange for the receipt of consideration equivalent to the amount paid; and (iii) it can be used for the purpose of paying consideration against the issuer or a person designated by the issuer.

A funds transfer transaction means "accepting or undertaking and carrying out a request from a customer to transfer funds by a mechanism for transferring funds without directly transporting cash between persons at a distance.

Although there is no definition under Japanese law, points are generally defined as a useable credit that is awarded free of charge when goods are purchased or services are rendered, and can be applied in whole or in part towards the price of subsequent purchases.

Presence of a duty to publish a prospectus bevor offering token/coins to investors

If the tokens issued by an ICO fall under the category of "cryptoassets", there is no duty to publish a prospectus before offering tokens to investors under the law. However, when selling tokens, the issuer or a person who sells tokens on behalf of the issuer must, in advance, provide the purchaser with information on the prescribed matters by means of a written document or electronic method. They must also make this information public in an electronic method that is easily accessible to the public under the “regulation for sale of new cryptoassets”, which is the self-regulatory rules set by the Japan Virtual and Crypto assets Exchange Association (JVCEA).

Presence of AML/KYC requirements that are needed to be fulfilled regarding (i) the initial issuance of token/coins and (ii) any following transfer of token/coins to third parties

As a Crypto Currency Exchange Service Provider is designated as a Specified Enterprise under the Act on Prevention of Transfer of Criminal Proceed, a Crypto Currency Exchange Service Provider which sells tokens issued by ICO that are considered cryptoassets is required to conduct Verifications at the Time of Transactions. The verifications, such as identity verification, are required under the Act on Prevention of Transfer of Criminal Proceed and the provider must also create and store verification records.
Verifications at the Time of Transactions are required when conducting the following transactions:

  • Opening an account for purchase and sale or exchange of cryptoassets, entering into contracts covering management of money related to the purchase and sale or exchange of cryptoassets, or management of cryptoassets;
  • Purchase and sale of exchange of cryptoassets where the value of the cryptoassets exceeds JPY 100,000; and
  • Transferring cryptoassets of customers in relation to the Cryptoassets Exchange Service, based on the request of customers where the value exceeds JPY 100,000.
In addition, a Cryptoasset Exchange Service Provider must confirm certain matters when it concludes an agreement with a Cryptoasset Exchange Service Provider located in a foreign country for continuous or repeated transfer of cryptoassets. Moreover, a Cryptoasset Exchange Service Provider must disclose the information of the sender and recipient to the recipient's Cryptoasset Exchange Service Provider at the time of transfer.

Additional comments regarding (i) the legal situation for ICOs/token/coins and (ii) any following transfer of token/coins to third parties

The guidelines from the FSA require reporting on the status of token sales on a regular or as-needed basis and stipulate special considerations. These considerations depend on whether the issuer sells the tokens itself or sells the tokens on behalf of the issuer. Therefore, it is necessary for a Cryptoasset Exchange Service Provider to take measures in accordance with the guidelines, while also taking into account the self-regulatory rules set forth by the JVCEA.


Economic conditions

Market size for ICOs/token sales and existence of any previous regulated ICO/token sales in the jurisdiction

In recent years, there have been few examples of ICOs. On the contrary, IEOs (Initial Exchange Offering) have recently become a popular alternative to ICOs. As of the end of March 2024, IEOs have been implemented in five cases in Japan and there are several projects that have announced that they are currently in the planning stage.

Additional comments regarding the economic situation for ICOs/token sales or what companies must be aware of in this business area

N/A




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