Japan’s Financial Services Agency (FSA) has proposed a significant overhaul of cryptocurrency regulation, suggesting a shift in oversight from the Payment Services Act to the more stringent Financial Instruments and Exchange Act (FIEA). The proposal, outlined in an FSA report presented on Tuesday, aims to bolster investor protection and align crypto regulation with established securities laws.
The FSA’s report highlights several key issues within the crypto investment landscape, including unclear white papers, inaccurate disclosures, unregistered operations, investment scams, low risk tolerances among investors, and security vulnerabilities at cryptocurrency exchanges. The agency believes that these problems are analogous to those traditionally addressed under the FIEA, warranting the application of similar regulatory mechanisms and enforcement measures.
It’s important to note that the FSA report is an internal briefing document intended for presentation to the Financial System Council, an advisory body to Japan’s Financial Services minister. The government will ultimately decide whether to implement new regulations based on the council’s recommendations. The report itself is not legally binding.
The report underscores the growing importance of cryptocurrency in Japan’s economy. The total number of accounts opened at domestic cryptocurrency exchanges exceeds 12 million, with user deposits surpassing 5 trillion yen ($33.7 billion). This equates to roughly one crypto exchange account for every ten people in the country. Data indicates that small-scale trading is prevalent, with over 80% of individual accounts holding less than $675.
The FSA also notes that 7.3% of individuals with investment experience hold cryptocurrency, a higher percentage than those trading foreign exchange (FX) or holding corporate bonds. Approximately 70% of Japanese crypto holders are middle-income earners, and 86% trade with the expectation of long-term price appreciation.
Finance Minister Katsunobu Kato recently acknowledged the potential role of cryptocurrencies in diversified investment portfolios. While recognizing the inherent volatility of crypto assets, he suggested that establishing a robust investment environment could make them a viable option for diversification.
Under the existing regulatory framework, the FIEA already treats crypto as a financial instrument when it serves as an underlying asset for derivatives. Full application of the FIEA would impose disclosure requirements on crypto issuers regarding public offerings and secondary distributions, aiming to reduce information asymmetry between issuers and investors.
Furthermore, FIEA rules would regulate intermediation and brokerages involved in buying and selling cryptocurrencies. They would also enforce rules against unfair trading practices and provide enforcement measures, including emergency injunctions against unregistered businesses.
