Amendment of Japanese CryptoRegulationsS O SA I TO
S O & SATO L AW OF F I CESAPRIL 24, 20201

Speaker’s biography• Admitted to the bar in Japan (1999-) and in the State of New York (2005-)• Founder of So & Sato Law Offices (2015-)• Legal adviser of the Japan Blockchain Association (JBA) (2014-)• Auditor of the Japan STO Association (2019-)• Specializing in crypto-related laws since 20132

Overview
Amendments to the following acts will enter into force on May 1, 2020
• Payment Services Act (“PSA”) which deals with crypto assets• Financial Instruments and Exchange Act ("FIEA ") which deals with
derivatives and security tokens

3Timeline
April 2017

existing crypto regulations enter into force

2017

crypto prices rise and many fraudulent ICOs arelaunched

January 2018

hack of Coincheck followed by on-site inspections ofregistered exchanges by the FSA

May 31, 2019

Diets pass amendments to existing crypto regulation

May 1, 2020

revised acts enter into force

4Key amendments• Stricter regulations for crypto asset exchanges, especially regarding
wallet regulation.

• The PSA will apply custody business.
• New crypto derivatives regulations (2x leverage ratio).

• New STO regulations.

5New Terminology

The term "Virtual Currency" in the PSA will be changed to “Crypto Asset”.

6New Cold Wallet Regulation
Exchanges must store at least 95% of their users’ crypto assets in a cold wallet.
Up to 5% of the users’ crypto assets may be held in hot wallet.
For users’ crypto assets stored in a hot wallet, an exchange must keep the sameamount of its own assets in a cold wallet (performance guaranteed crypto asset)=
100% of users’ crypto assets stored in a cold wallet

ImpactIncreased security, higher costs.
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[I will insert figures]

8New Custody Business Regulation (1)The current crypto laws regulate persons who conduct the following business• purchase/sale of crypto assets (exchange between fiat and crypto assets)• exchange of crypto assets with other crypto assets
The amended PSA now regulates the “custody of crypto assets on behalf ofothers” (excluding regulated trust businesses).

Custody business operators must take the same license as exchanges.

9New Custody Business Regulation (2)ImpactCustody service is mainly provided by already registered exchanges. The impact
is therefore limited.
Custody of one of multi-signature is not considered as custody service.
Some small wallet service providers intend to change their business model,
others announced to withdraw from the business.

10New Crypto Derivatives Regulations (1)Under the revised FIEA crypto assets are now included in the definition of“financial instruments”. Crypto derivatives are therefore regulated under thenew FIEA.
Only Type I FIBO can deal with crypto derivatives.
Leverage ratio

Currently 4X times under self-regulations → 2X in general.

11New Crypto Derivatives Regulations (2)ImpactTrading in Japan will be safer.
More corporate investors may join because of clarification of regulations

Trading volume of individuals will be less / Some exchanges will stop operations
or merge.
Some investors will use foreign exchanges (100X leverage ratio). (illegal)

No tax reform yet

12Security Token Offerings (1)The revised FIEA defines “electronic record transfer rights” (ERTR).
ERTR are type II securities (e.g. units in a fund) which are tokenized.
ERTR are subject to regulations similar to type I securities

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Security Token Offerings (2)Type I Securities

Type II Securities

characteristicfeatures

highly liquid securities (e.g.
stocks, corporate bonds, units
in investment trusts)

illiquid rights (e.g. funds,partnerships in a limited liabilitycompany, beneficiary interests
in an ordinary trust)licenserequirements

handled by a Type I FIBO (e.g.
securities company)

handled by Type II FIBO (e.g.
fund companies)

disclosure
requirements

yes

no, in general14Security Token Offerings (3)The treatment of ERTR is similar to the treatment of type I securities.
• Type I FIBO must handle ERTR
• disclosure requirements apply
It is possible to tokenize type I securities (e.g. shares, bonds, units in investment
trusts). In general, there are no amendments for tokenized type I securities
under the new laws.

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Security Token Offerings (4)Exemptions to disclosure requirements for type I securities also apply to ERTR.
• Small number exemption (solicitation of less than 50 persons)• Qualified institutional investors only exemption• Small amount exemption (less than JPY100M)

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STOs and the Civil CodeNew FIEA is just financial regulation.
There are no changes in the Civil Code or the Companies Act.

• Japanese Civil Code requires written notice with certified date or writtenconsent with certified date for transfer of credit rights.
• Japanese Companies Act requires change of shareholders’ list for transfer ofshares (electronic record is OK).
To issue security tokens, we need to analyze the Civil Code etc. in more detail.
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The future of the Japanese digital assetindustry.
• Regulation is strict.
• It is difficult for startups to do business.

• Big companies consider entering the STO market.
More detailed information is written in our firms report.
https://innovationlaw.jp/en/digital-assets-in-japan/

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