Japan's Crypto Regulation Revolution! Shifting from Payments to Securities, a 20% Tax Rate to be Implemented

Japan’s Financial Services Agency (FSA) has released a report indicating that it is preparing to transfer regulation of crypto assets from the country’s payment systems into a framework specifically designed for investment and securities markets. Core changes in the report include strengthening disclosure requirements for Initial Exchange Offerings (IEOs), cracking down on unregistered platforms, clarifying the prohibition of insider trading, and considering lowering cryptocurrency profit tax rates to a unified 20%.

A Paradigm Shift from Payment Laws to Securities Laws Regulation

(Source: Japan Financial Services Agency)

Including cryptocurrencies under FIEA regulation signifies a fundamental shift in Japan’s understanding of their nature. The FSA’s report states, “Crypto assets are increasingly used domestically and internationally as investment targets,” revealing an evolution in the practical application of cryptocurrencies. Initially, Japan regulated cryptocurrencies under the Payment Services Act, based on the assumption that assets like Bitcoin can serve as payment tools. However, as the market develops, the investment attributes of cryptocurrencies far exceed their payment functions.

This shift is not unique to Japan but aligns with global regulatory trends. The US SEC has long maintained that most cryptocurrencies are securities, and the EU’s MiCA framework also regards crypto assets as financial instruments rather than mere payment methods. Japan’s reform brings its regulatory logic in line with international standards, facilitating cross-border cooperation and investor protection.

The substantive changes brought by including cryptocurrencies under securities law regulation are comprehensive. First, entities issuing and trading cryptocurrencies will face the same rigorous oversight as traditional securities markets. Second, investor protection mechanisms will be significantly enhanced, including disclosure requirements, anti-fraud provisions, and market manipulation bans. Third, regulators will gain stronger enforcement tools to penalize violations more effectively.

The report emphasizes the need to establish regulatory measures that treat cryptocurrencies as financial products to protect users. This indicates that Japanese regulators recognize that the complexity and risks of the crypto market have exceeded the scope of payment regulation and require a more comprehensive and strict securities law framework. This shift in understanding is positive, as it acknowledges cryptocurrencies as legitimate new financial assets and provides a legal basis for establishing a more orderly market.

Comprehensive Upgrade of IEO Disclosure Requirements

One of the core changes from bringing cryptocurrencies under FIEA regulation is the strengthened disclosure requirements for IEOs or token sales managed by crypto exchanges. The document states, “User-initiated crypto transactions are similar to securities trading, potentially involving the sale of new crypto assets or trading of circulating assets,” emphasizing the importance of timely information disclosure during IEO sales.

IEOs play an important role in Japan’s crypto market. Unlike ICOs (Initial Coin Offerings), IEOs are led and endorsed by exchanges, theoretically providing additional security for investors. However, in recent years, some IEO projects have performed poorly after launch, even leading to scams, exposing weaknesses in existing regulatory frameworks. The new disclosure requirements aim to address these issues.

New Requirements for IEO Information Disclosure

At the exchange level: Must provide pre-sale disclosures, including detailed information about the core entities behind the issuance, independent third-party code audit reports, and feedback from self-regulatory organizations.

At the issuer level: Must disclose their identity (regardless of whether the project is decentralized), detailed descriptions of the token issuance and distribution mechanisms, and the project’s business model and revenue sources.

These requirements are similar to the prospectus system in traditional securities issuance. In the stock market, companies must submit detailed prospectuses before listing, disclosing financial status, business models, risk factors, etc. The new IEO disclosure standards will bring this transparency to the crypto market, enabling investors to make informed decisions.

Particularly noteworthy is the requirement for “independent third-party code audits.” Technical risks in crypto projects are often overlooked, and vulnerabilities in smart contracts can lead to fund losses or project failures. Mandating professional audits will significantly improve the technical reliability of projects and create new opportunities for audit firms.

The requirement that “the issuer’s identity must be disclosed regardless of whether the project is decentralized” directly challenges some projects’ attempts to evade regulation by claiming decentralization. Many projects claim they are “completely decentralized” and thus should not be subject to traditional regulation. However, FSA’s new rules explicitly state that, regardless of technical architecture, if tokens are issued and sold, there must be a clear responsible entity subject to regulation.

Crackdown on Unregistered Platforms and Insider Trading Bans

The proposed framework will grant regulators stronger tools to combat unregistered platforms, especially those operating overseas or related to decentralized exchanges. This has been a long-standing issue in Japan’s crypto regulation. Many overseas exchanges serve Japanese users without registering with the FSA, creating regulatory gaps and lacking investor protections.

The new framework will allow the FSA to take more proactive enforcement actions, including blocking access to unregistered platform websites, freezing assets within Japan, and collaborating with overseas regulators for cross-border enforcement. DEXs (Decentralized Exchanges) pose another challenge since they lack centralized operational entities and are difficult to hold accountable. The FSA’s new approach may require DEXs to appoint local representatives or compliance officers before operating in Japan, similar to the EU’s MiCA framework.

The framework also explicitly bans insider trading, aligning with the EU’s MiCA and Korea’s relevant regulations. Insider trading involves trading based on material non-public information for profit. While strictly prohibited and penalized in traditional securities markets, insider trading has remained a regulatory gray area in crypto markets.

Introducing insider trading bans in crypto markets is significant. Many project teams, early investors, or exchange employees may possess undisclosed, price-sensitive information, such as major partnerships, technological upgrades, or regulatory rulings. Banning insider trading will protect ordinary investors from informational asymmetries and improve market fairness. Enforcement will require the FSA to develop monitoring systems to detect suspicious trading patterns and cooperate with exchanges to identify potential insiders.

20% Unified Tax Rate and Caution on ETF Derivatives

As the Japanese government considers lowering the maximum profit tax rate on cryptocurrencies, news has emerged about regulatory reforms. The plan proposes imposing a uniform 20% tax rate on all crypto trading profits. This is a long-anticipated reform for Japanese crypto investors. Currently, Japan treats crypto gains as miscellaneous income, taxed under progressive rates up to 55% (including national and local taxes). Such high rates severely dampen investment willingness, leading many investors to hold rather than sell to avoid tax liabilities.

The 20% flat tax rate aligns with capital gains taxes on stocks and bonds, and this parity will eliminate tax discrimination against cryptocurrencies, encouraging more participation. For the crypto industry, this represents a major positive development that could boost trading volume and market activity. However, the timeline and specific details of the tax reform have not yet been announced, and investors should await further updates.

On Tuesday, the FSA also expressed caution regarding derivatives based on foreign crypto ETFs, reportedly citing “undesirable underlying assets.” This cautious stance is consistent with Japan’s conservative approach to crypto ETFs. While the US has approved spot Bitcoin and Ethereum ETFs, Japan has not followed suit. The FSA’s concerns mainly focus on the volatility of underlying assets, market manipulation risks, and investor protection issues.