DIGITAL ASSETS IN JAPAN
Digital assets, crypto derivatives, primary markets, secondary markets, and key
market infrastructure
08/04/2020 (FINAL)
by So Saito and Joerg Schmidt

Contents
1.

DIGITAL ASSETS ................................................................................................... 2

1.1.

Crypto assets under the PSA ..................................................................................... 2

1.2.

Electronically recorded transfer rights under the FIEA ............................................ 3

1.3.

Crypto derivatives..................................................................................................... 4

2.

PRIMARY MARKETS ............................................................................................. 5

2.1.

Utility tokens ............................................................................................................. 5

2.1.1.

Self-offering .................................................................................................................6

2.1.2.

IEO ...............................................................................................................................7

2.2.

Security tokens .......................................................................................................... 9

2.2.1.

Public Offering ..........................................................................................................10

2.2.2.

Private Placement ......................................................................................................10

2.2.3.

Self-Offering ..............................................................................................................112.2.4.

Third Party Offerings .................................................................................................11

3.

SECONDARY MARKETS ..................................................................................... 12

3.1.

Utility tokens ........................................................................................................... 13

3.1.1.

Crypto Asset Exchanges ............................................................................................13

3.1.2.

OTC trading ...............................................................................................................15

3.1.3.

Professional Traders / Market Makers / Liquidity Providers .....................................16

3.2.

Security tokens ........................................................................................................ 16

3.2.1.

Exchanges for tokenized securities and electronically recorded transfer rights ........16

3.2.2.

OTC ...........................................................................................................................20

3.2.3.

Professional Traders and Liquidity Providers ............................................................21

3.3.

Derivatives .............................................................................................................. 21

4.

CUSTODY SERVICES – CUSTODIANS AND CRYPTO ASSET EXCHANGES.. 22

4.1.

Crypto Assets .......................................................................................................... 23

4.2.

Security tokens ........................................................................................................ 24

5.

CONCLUSION ....................................................................................................... 25

DIGITAL ASSETS IN JAPAN
Digital assets, primary markets, secondary markets, and key
market infrastructure
Starting with Bitcoin in 2009, crypto assets have come a long way. Now,
more than ten years later, the ecosystem is more diverse than ever, andbitcoin and other crypto assets are on the verge of becoming a new asset
class. At the same time, blockchain technology has made significant
progress and evolved from a pure state transition system to fully
programmable networks. 2nd and 3rd generation networks allow otherprojects to build dApps on their platform and to deploy smart contracts
to issue their own tokens. With the rise of these platforms, Initial Coin
Offerings (ICOs), Initial Exchange Offerings (IEOs), and Security Token
Offerings (STOs) have become a popular mechanism to raise funds. The
flexibility offered by 2nd and 3rd generation networks also opened up new
possibilities for more complex applications such as DeFi.
The potential of blockchain technology has also been recognized bygovernments around the globe. Experiencing pressure from projects suchas Libra, some of them have intensified their research on central bankdigital currencies and other blockchain applications.
While the industry is increasingly professionalized, major hacks exposedvulnerabilities in the existing infrastructure. Money laundering is anotherconcern for policymakers. In view of these challenges and an increasingly
diversified environment, the Japanese legislator amended the Japanesecrypto regulations and published subsidiary legislation more recently. Thechanges are entering into force on May 1, 2020.
In this article, we take a closer look at the regulatory treatment ofdifferent digital assets, analyze the primary and secondary markets forthem and provide an overview of different players in the industry,
reaching from exchanges to liquidity providers and custodians.
Our article does not consider the current regulatory environment. For
more information on the existing framework, please visit our older articles,
which can be found here.

Page 1 of 25

1.

DIGITAL ASSETS
There is no general definition of digital assets under Japanese laws. Rather,
the Payment Services Act (PSA) and the Financial Instruments andExchange Act (FIEA) define certain types of digital assets. The definitions
are mutually exclusive and – seen as a whole – form a complete picture
covering cryptocurrencies, utility tokens and investment tokens. 1 Nonfungible tokens (NFT) and stable coins2 are not necessarily covered by thedefinitions in the PSA and the FIEA.

1.1.

Crypto assets under the PSA
The PSA defines crypto assets exhaustively. Type I crypto assets aredefined as property value that can be (i) used with unspecified persons forpurchasing goods or services, (ii) purchased from and sold to unspecified
persons acting as counterparty, and (iii) transferred electronically.3

1 In this article cryptocurrencies, utility tokens, and investment tokens have thefollowing meanings: (i) cryptocurrencies are tokens which are intended to be used asmeans of payment, (ii) utility tokens give token holders access to an application orservice and often serve as a platform-internal currency, (iii) investment tokens allow
token holders to participate in the profits of the issuer or the underlying network.
Besides these pure forms, hybrid forms exist. The regulatory treatment of these hybrid
tokens must be assessed carefully on a case-by-case basis and are therefore notcovered by this article.
2 To learn more about the regulatory treatment of stable coins under Japanese laws,
please visit https://innovationlaw.jp/wp/wp-content/uploads/2019/06/ENstable_coin_article_190621.pdf.
3 Article 2(5)(i) PSA.

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Type II crypto assets are property values that can be (i) mutually
exchanged with type I crypto assets with unspecified persons acting as acounterparty and (ii) transferred electronically.4
Currency denominated assets and electronically recorded transfer rights
as defined in the FIEA are explicitly excluded from the definition of crypto
assets.5

1.2.

Type I crypto assets:

cryptocurrencies

Type II crypto assets:utility tokens

Electronically recorded transfer rights under the FIEA
For a better understanding of electronically recorded transfer rights, it isworth looking at the definition of securities under the FIEA. The FIEA
contains a comprehensive list of securities and distinguishes between
type I and type II securities. Type I securities are traditional securities suchas bonds and stocks, which are generally perceived as being highly liquid.6
Type II securities are, for example, units in a fund, beneficial interests in atrust, membership rights in a general partnership or limited partnership,and equity in limited liability companies.7 These securities are generally
much less liquid than type I securities and are therefore subject to lighter
regulation. With the occurrence of tokenization, type II securities became,however – at least in theory – much more liquid. As a response, thelegislator introduced electronically recorded transfer rights into the FIEA.
These rights represent type II securities which are treated as type I
securities.8
The FIEA defines electronically recorded transfer rights as (i) electronicallyrecorded property values that (ii) represent type II securities and can be(iii) transferred by electronic means. In addition, (iv) there must not be
any liquidity constraints or other circumstances specified by cabinet
order.9 Tokens that are sold to professional investors and for which thetransferability is technically restricted, fall under the exemption of item(iv).10

4 Article 2(5)(ii) PSA.
5 Article 2(5) PSA.
6 See Article 2(1) FIEA.
7 See Article 2(2) FIEA.
8 Article 2(3) FIEA.
9 Ibid.
10 See Article 9-2(1)(i) and Article 9-2(1)(ii) Cabinet Order on Definitions under Article

2 of the FIEA in connection with Article 17-12 Order for Enforcement of the FIEA.

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Tokens representing type I securities are not covered by the definition ofelectronically recorded transfer rights and are therefore not excluded
from the definition of crypto assets.11 According to unofficial statements,
the Financial Services Agency (FSA) considers type I securities as currency
denominated assets, however, which are excluded from the definition of
crypto assets as well.

1.3.

Crypto derivatives
Crypto derivatives such as CFDs, futures, options, and swaps have become
increasingly popular more recently. Some of them are said to legitimize
crypto assets as a whole and to provide additional liquidity to crypto
markets. In Japan, crypto derivatives account for roughly 90 percent of
the total crypto trading volume.12
Crypto assets as defined in section 1.1 above are financial instruments
within the meaning of the FIEA. 13 Derivatives using crypto assets asunderlying or crypto asset indices as reference indices are therefore
covered by the FIEA. 14 The FIEA distinguishes between derivatives
transactions conducted on financial instruments market and OTC
derivatives transactions.
Market derivatives transactions include15-

futures-

index futures-

options-

swaps

OTC derivatives transactions include16-

forward contracts-

index forward contracts-

options-

index options

-

swaps

11 See Article 2(5) PSA.
12 Seehttps://jvcea.or.jp/cms/wp-content/themes/jvcea/images/pdf/statistics/2019
12-KOUKAI-01-FINAL.pdf.
13 Article 2(24)(iii-2) FIEA.
14 Article 2(20) FIEA.
15 Article 2(21) FIEA.
16 Article 2(22) FIEA.

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Excursion – Physical Settlement and Crypto Asset Exchange License
Crypto assets are deemed money under certain provisions of the
FIEA. 17 Derivatives transactions may therefore be settled in cash or
physically, i.e. by using crypto assets for settlement. The guidelines forcrypto asset exchanges explicitly state that a crypto asset exchangelicense is not required in such cases.18 In cases of margin trading where
crypto assets are taken as collateral, something different might apply.

2.

PRIMARY MARKETSTokens are often used for fundraising purposes. In this section, we take acloser look at fundraising via initial coin offerings (ICOs), initial exchange
offerings (IEOs), and security token offerings (STOs).

2.1.

Utility tokens
The offering of utility tokens for fundraising purposes is commonly known
as ICO. Under the PSA, the offering of new tokens in exchange for fiat or
cryptocurrencies is considered a crypto asset exchange service. 19 An
issuer must therefore either register as a crypto asset exchange service
provider20 or sell his tokens via one of the registered exchanges. In thelatter case, the exchange may either act as an intermediary or buy and sell
the tokens on its own account.21

17 Article 2(2) FIEA in connection with Article 1-23 Order for Enforcement of the FIEA.
18 I-I-2-2(5) Guidelines on Crypto Asset Exchange Business.
19 For the definition of crypto asset exchange service see Article 2(7) PSA.
20 Article 63-2 PSA in connection with Article 2(8) and Article 2(7) PSA; see also II-2-2-

8-1 Guidelines on Crypto Asset Exchange Business.
21 See also item 6 concerning Article 2 JVCEA Guidelines on the Sale of New Crypto
Assets.

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Excursion – Registration as crypto asset exchange
To register as a crypto asset exchange, companies must meet certain
criteria. Local companies must be incorporated as a stock company22
and have a minimum capital of JPY 10 million 23 . An exchange must
further ensure that its net assets do not fall below the amount of users’
funds that are stored in a hot wallet.24
Aside from this, crypto asset exchanges must implement corporate
governance and security systems that ensure fair dealing on theexchange and reduce operational risks. 25 The latter includes theseparation of funds – both for crypto assets26 and fiat currencies27 –and the proper management of users’ funds held by the exchange (formore details, see section 4.1 below). Crypto asset exchanges violating
their obligations under the PSA are subject to fines of up to JPY 3
million.28
While foreign crypto asset exchanges are generally able to register andoperate in Japan, none of the 23 registered exchanges is currently aforeign exchange.29

2.1.1. Self-offering
Under the ICO regulations of the Japan Virtual Currency Exchange
Association (JVCEA), an issuer who has successfully applied for a crypto
asset exchange license must analyze its internal control and the feasibilityof the target business comprehensively before launching its ICO.30 The
analysis must be based on certain documents, including the issuer’s
financial statements, material agreements, business plan, whitepaper,and other documents deemed necessary by the issuer.31 The results of
the analysis must be submitted to the JVCEA for final review.32 Only if the
22 Article 63-5(1)(i) PSA.
23 Article 63-5(1)(iii) PSA in connection with Article 9(1)(i) Cabinet Order on Crypto

Asset Exchange Service Providers.
24 Article 25 Cabinet Order on Crypto Asset Exchange Service Providers.
25 Article 63-5(iv) and (v) PSA.
26 Article 63-11(2) PSA in connection with Article 27 Cabinet Order on Crypto Asset
Exchange Service Providers.
27 Article 63-11(1) PSA in connection with Article 26 Cabinet Order on Crypto Asset
Exchange Service Providers.
28 See Articles 107 et seq PSA.
29 A list of all registered exchanges in Japan can be accessed under the following link
https://www.fsa.go.jp/menkyo/menkyoj/kasoutuka.pdf.
30 Article 4(1) JVCEA Rules for the Sale of New Crypto Assets.
31 Article 4(2) JVCEA Rules for the Sale of New Crypto Assets.
32 Article 4(4) JVCEA Rules for the Sale of New Crypto Assets.

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JVCEA does not raise any objections, the issuer may launch its ICO in
Japan33 after giving notice to the FSA34.
When selling tokens to the broader public, an issuer must disclose a wide
variety of information to the public in order to allow investors to make an
informed decision. This includes among others:35
i.

information on the issuer

ii.

information on the tokens and the token sale (incl. pricing
information, incentives, sales period, token allocation, caps, future
distributions)iii. information on the use and the accounting treatment of the raised
funds
iv. information on the projectv.

governing law and jurisdiction

Once the ICO is completed, the issuer must provide token holders withsales data, including information on the number of tokens issued and thetotal amount collected. 36 Token issuers are further subject to ongoingdisclosure and must publish data about the status of the project andmarket value of the tokens at regular intervals.37 This generally applies fora period of five years unless the protection of users is not compromised,
and the issuer has informed the JVCEA.38
An issuer may not use the raised funds for any other purpose thandisclosed to investors during the ICO39 and must manage them separatelyfrom its other funds40. The private key controlling the raised funds must
generally be stored offline.41 The issuer must further establish an internal
control system to prevent the misappropriation of funds by its officers andemployees or the theft by third parties.42

2.1.2. IEO
Registered exchanges that allow other projects to launch their token
offerings via their exchange must implement internal control systems to
33 Article 4(5) JVCEA Rules for the Sale of New Crypto Assets.
34 Article 63-6(1), 63-3(1)(vii) and (viii) PSA.
35 Article 5(1) JVCEA Rules for the Sale of New Crypto Assets.
36 Article 5(2) JVCEA Rules for the Sale of New Crypto Assets.
37 Article 5(3) JVCEA Rules for the Sale of New Crypto Assets.
38 Ibid.
39 Article 6(2) JVCEA Rules for the Sale of New Crypto Assets.
40 Article 6(1) JVCEA Rules for the Sale of New Crypto Assets.
41 Article 6(4) JVCEA Rules for the Sale of New Crypto Assets.
42 Article 6(5)-(7) JVCEA Rules for the Sale of New Crypto Assets.

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safeguard investors from investing in projects which are not feasible or an
outright scam.43 At the same time, they must ensure that the token issuer
has systems in place to prevent inappropriate solicitation of the token saleor the misappropriation of funds.44
When assessing whether a token offering can be launched via its platform,
an exchange must consider the issuer’s financial situation. To do so, an
exchange must review the financial statements of the token issuer and, if
possible, conduct a hearing with a certified accounting or auditing firm.45
The sales price of the newly issued tokens must be determined inaccordance with reasonable valuation methods (e.g. surveys on
investment demand).46 Registered exchanges must also ensure that theraised funds do not exceed the amount which is determined in thebusiness plan of the issuer.47 The results of the overall assessment mustbe submitted to the JVCEA for final review.48 If the JVCEA finds that theoffering is not feasible, the exchange must not proceed.49
To ensure that the trading of tokens is safe, exchanges must audit thesmart contract and the blockchain protocol before launching the token
sale.50 The duty to ensure safety does, however, not end with the token
sale. Rather, exchanges are required to monitor the system on an ongoingbasis and report vulnerabilities to the JVCEA.51
Before offering new tokens on their platform, cryptocurrency exchanges
must further publish certain information on their homepage. This
information is largely identical to the information indicated in section
2.1.1.52 Following the offering, the cryptocurrency exchange must ensurethat the issuer properly maintains the internal control systems anddisclosure mechanisms.53 This does not apply if five years have passed
since the offering or where the exchange has informed the JVCEA thatinvestor protection is not compromised if compliance is no longer
monitored by the exchange.54

43 Article 9 et seq. JVCEA Rules for the Sale of New Crypto Assets.
44 Article 15(1) JVCEA Rules for the Sale of New Crypto Assets.
45 Article 15(3) JVCEA Rules for the Sale of New Crypto Assets.
46 Article 18(1) JVCEA Rules for the Sale of New Crypto Assets.
47 Article 18(2) JVCEA Rules for the Sale of New Crypto Assets.
48 Article 18(3) JVCEA Rules for the Sale of New Crypto Assets.
49 Article 15(5) JVCEA Rules for the Sale of New Crypto Assets.
50 Article 17(1) JVCEA Rules for the Sale of New Crypto Assets.
51 Article 17(2)-(5) JVCEA Rules for the Sale of New Crypto Assets.
52 Article 15(6) JVCEA Rules for the Sale of New Crypto Assets.
53 Article 16(1) JVCEA Rules for the Sale of New Crypto Assets.
54 Ibid.

Page 8 of 25

Note: If an issuer actively engages in the token sale, this might beconsidered a crypto asset exchange service by the issuer and trigger
registration requirements under the PSA despite selling the tokens via
a registered exchange.55 Whether this is the case must be determinedon a case-by-case basis considering the degree of engagement andother factors.

2.2.

Security tokens
The solicitation of an offer to sell securities in Japan is generally regulated
under the FIEA. The term is understood broadly and covers any
communication which allows investors to decide whether to purchase or
subscribe for the offered securities. While there is no bright-line test,
providing information on the terms of an offering is a clear indication ofsolicitation. As a rule of thumb, the more granular the information, themore likely it is that the marketing is considered a solicitation. Offers via
the internet are generally considered a solicitation to invest in securities
if they are made through a website that is publicly accessible. The use of
the Japanese language is not necessarily required. Only where investors
from Japan are effectively excluded from participating in the offer, forexample, by geo-blocking or a KYC-process, an offering is not considereda solicitation of an offer to sell securities in Japan. A disclaimer, according
to which Japanese investors are excluded from the offer, is not sufficienton its own but may, in combination with other measures, prevent the FIEA
to apply.
The FIEA distinguishes between public offerings and private placements,
self-offerings, and offerings via intermediaries.

55 See also item 3 concerning Article 1 JVCEA Guidelines on the Sale of New Crypto

Assets.

Page 9 of 25

2.2.1. Public Offering
The offering of tokenized type I securities and electronically recordedtransfer rights is considered a public offering if the tokens are offered to
50 or more investors. 56 Qualified institutional investors (QII) andprofessional investors as defined in the following section, are notconsidered when assessing the number of investors.
Public offerings with a total issue price of JPY 100 million (~ USD 915,000)
or more must be registered with the FSA 57 and accompanied by aprospectus58.

2.2.2. Private Placement
Offerings via private placements must not be registered with the FSA.
Under the FIEA, the following offers are considered private placements59:
i.

offers to QII only where the transfer to persons other than QII is
unlikelyii.

offers to professional investors only which satisfy all of the following
requirements-

solicited party is not the state, the Bank of Japan (BoJ), or a QII-

solicitation by a Financial Instruments Business Operator (FIBO)
on its own behalf or on behalf of a client

56 Article 2(3) FIEA, Article 1-5 Order for Enforcement of the FIEA.
57 Article 4(1)(v) FIEA.
58 Article 13(1) FIEA.
59 Article 2(3) FIEA.

Page 10 of 25

-transfer to persons other than professional investors is unlikely

iii. offers to a small number of investors (< 50)
The definition of QIIs is rather extensive and consists of a long list of
examples. 60 The list includes investment corporations, venture capitalcompanies with a stated capital of JPY 500 million or more*, investment
limited partnerships as well as special purpose companies*, other legal
persons* and individuals* holding securities of at least JPY 1 billion.
Professional investors within the meaning of the FIEA are QIIs, the state,
the BoJ, investor protection funds, and other corporations specified bycabinet order. The latter includes among others foreign corporations,specific purpose companies, and listed companies.
Tokens acquired in a private placement by QII or professional investors
may not be resold to persons other than QII or professional investors as
the case may be. If the tokens are resold in violation of the restrictions on
resale, the issuer must file a registration statement with the FSA. This does
not apply if the tokens are sold to a small number of investors and aresubsequently resold by the initial investors to more than 49 persons.

2.2.3. Self-Offering
Companies selling their own tokens in a private placement or public
offering do generally not have to register as a FIBO. This applies to boththe offering of tokenized type I securities and the offering of electronicallyrecorded transfer rights.
Only where the tokens represent beneficial interests in a (foreign)
investment trust, (foreign) mortgage securities, units in (foreign)collective investment schemes, or where another case explicitly
mentioned in the FIEA applies, the issuer must register as type II FIBO.61
The registration requirements apply irrespective of whether the offering
is a public offering or a private placement.

2.2.4. Third Party Offerings
Intermediaries who are engaging in the offering of security tokens mustregister as a type I FIBO under the FIEA.62

60 Article 10 Cabinet Order on Definitions under Article 2 FIEA.
61 Articles 28(2)(iii), 2(8)(vii) FIEA.
62 Article 28(1) and 29 FIEA.

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tokenized type I securities

type I FIBO

electronically recordedtransfer rights

type I FIBO

Excursion – Other laws
Token issuers must not only comply with the PSA or the FIEA but alsowith other laws and regulations. The applicable laws do not only
depend on the features assigned to a token but also on the way thetokens are distributed. Certain laws may contain form requirements(e.g. physical form), which must be carefully considered whenstructuring the token and offering. As a general rule, it is however
possible to tokenize most assets, including private shares. This topic will
be covered in more detail in another article.

3.

SECONDARY MARKETS
Similar to the offering of tokens on the primary market, the trading on thesecondary market is subject to different laws depending on whether thetoken is a crypto asset under the PSA or a tokenized security/electronicallyrecorded transfer right under the FIEA. Crypto asset exchanges licensed
under the PSA may not trade security tokens and vice versa.
In this section, we take a closer look at the secondary markets and otherkey players supporting the trading infrastructure.

Page 12 of 25

3.1.

Utility tokens

3.1.1. Crypto Asset Exchanges
Under the PSA crypto asset exchanges and other companies providing
crypto asset exchange services must register as crypto asset exchange
service providers with the FSA. 63 Crypto asset exchange services aredefined broadly and cover the following activities, provided they arecarried out as a business:i.

purchase and sale of crypto assets or exchange with other crypto
assetsii.

intermediary, brokerage or agency services for the purchase and saleof crypto assets or exchange with other crypto assets

iii. custody services for crypto assets64
Given the broad definition of crypto asset exchange services, not only
crypto asset exchanges must register with the FSA but also other service
providers engaging in crypto-related activities (for custody services see
section 4.1 below).
Crypto asset exchanges must implement corporate governance andsecurity systems that ensure fair dealing on the exchange and reduce
operational risks. 65 This includes among others toi.

establish and maintain a business management systemii.

comply with AML/CFT regulations

iii. eliminate relationships with anti-social forces
iv. ensure the protection of customers and their funds (e.g. segregationof funds, storing funds in cold wallets, and retaining own funds
equivalent to the users’ funds held in a hot wallet)v.

implement and maintain an information security management
systemvi. prepare, submit, and maintain records related to crypto asset
exchange services
vii. prohibit misleading advertisement and advertisement of speculative
tradingviii. prohibit and report unfair trading practices (e.g. market
manipulation)
63 Article 63-2 PSA.
64 Article 2(7) PSA.
65 Article 63-5(iv) and (v)PSA, Cabinet Order on Crypto Asset Exchange Service

Providers.

Page 13 of 25

ix. make prior notification to the FSA in case of changes (e.g. listing of
new tokens, change of scope of crypto asset exchange services)
This list is not exhaustive, and further obligations arise under subsidiarylegislation and self-regulation imposed by the JVCEA. The self-regulation
rules by the JVCEA consistently extend existing regulations and specify ingreater detail the obligations under the PSA and AML/CFT regulations.
Crypto asset exchanges and other service providers registered as crypto
asset exchange service providers must not engage in activities related tosecurity tokens. These activities are exclusively subject to the FIEA andrequire additional registrations/licenses.

Excursion: Listing of new tokens
Each token must be analyzed in detail before listing. Where a token
violates laws or is likely to be used for criminal activities (incl. money
laundering), it must not be listed.66 This applies in particular for privacy
coins for which transactions are anonymous or extremely difficult totrack. The results of the analysis must be reported to the board of
directors and eventually to the JVCEA.67 In cases in which the JVCEA
does not approve the listing, the respective token must not be listed.68
The listing of the new token must further be notified to the FSA prior
to the token being listed.69

Excursion: Margin trading
Crypto asset exchanges providing leverage must inform their users
about the risks of margin trading, circuit breakers (if any), as well as thedeadline and modalities of repayment. 70 For retail investors, theleverage must not exceed 2x.71 For corporate clients, there is no fixedmaximum leverage. Instead, the ratio may be determined
independently by the respective exchange based on a quantitative
calculation model or by the JVCEA.72 Crypto asset exchanges that do
66 Article 4(1) JVCEA Guidelines on Handling Crypto Assets.
67 Article 5 JVCEA Guidelines on Handling Crypto Assets.
68 Article 4(2) JVCEA Guidelines on Handling Crypto Assets.
69 Article 63-6, 63-3(3)(vii) PSA, Article 12(1) Cabinet Order on Crypto Asset Exchanges.
70 Article 63-10(2) FIEA, Article 25 Cabinet Order on Crypto Asset Exchanges, II-2-2-2-

2(1) Guidelines: Crypto Asset Exchanges.
71 Article 25(4)(5)(i) Cabinet Order on Crypto Asset Exchanges, II-2-2-2-2(2)(i)Guidelines: Crypto Asset Exchanges.
72 Article 25(4)(5)(ii) Cabinet Order on Crypto Asset Exchanges, Article II-2-2-2-2(2)(ii)
Guidelines: Crypto Asset Exchanges.

Page 14 of 25

not wish to use these ratios may alternatively use the standard leverageof 2x for corporate clients as well.73 Security deposits may be paid bothin fiat and crypto assets. The amount required as a security deposit iscalculated each business day. 74 In case of deficiencies, additional
payments must be made within 48 hours from the time detecting the
deficiency.75
Crypto asset exchanges lending fiat to their users must additionally
apply for a money lending license under the Money Lending BusinessAct.76 Exchanges lending crypto assets do not have to apply for suchlicense.

3.1.2. OTC trading
Given the broad definition of crypto asset exchange services, OTC desks
generally seem to be regulated under the PSA at first sight. This applies toboth principal desks and agency desks. A closer look at the definition of
crypto asset exchange services reveals however, that this is notnecessarily the case.
Principal desks: Principal desks buy and sell crypto assets in their own
name and on their own account and become counterparty to eachtransaction. Exchanging crypto assets into fiat currencies and vice versa
generally falls under buying and selling of crypto assets as defined in the
PSA. The same is true for exchanging crypto assets with other crypto
assets.
Agency desks: Agency desks do not become a counterparty totransactions. Rather they act as pure intermediaries and broker deals onbehalf of their clients. Such activities constitute intermediary services thatare generally covered by the PSA.
The reason why many OTC activities are excluded from the registration
requirement under the PSA is that those activities are not performed ‘inthe course of business’ as interpreted by the FSA. While the term isgenerally interpreted broadly, it only covers situations in which therespective party faces the public, i.e. an unspecified large number of73 Ibid.
74 II-2-2-2-2(2)(3) Guidelines: Crypto Asset Exchanges.
75 II-2-2-2-2(2)(4) Guidelines: Crypto Asset Exchanges.
76 Article 3(1) Money Lending Business Act.

Page 15 of 25

people, and does so with a certain continuity.77 Whether this is the casemust be determined on a case-by-case basis. Depending on the facts andcircumstances of each case, OTC desks may or may not be covered by thedefinition of crypto asset exchange services. Engaging in trades with one
or a few registered crypto asset exchanges does generally not trigger the
license requirement under the PSA. A one-size-fits-all solution does,
however, not exist.

3.1.3. Professional Traders / Market Makers / Liquidity Providers
Trading activities of professional traders and market makers do notconstitute crypto asset exchange services under the PSA. This is due to thefact that proprietary trading is not considered a purchase or sale of crypto
assets as a business under the PSA. The reason for this is that the PSA aims
to regulate certain activities that pose a risk to the public. It does, however,not intend to regulate all activities related to crypto assets. Trading on
regulated exchanges does not pose additional risks to the public and does
therefore not fall within the ambit of crypto asset exchange services under
the PSA.

3.2.

Security tokens
The trading of security tokens on secondary markets is a problem notsolved yet. While crypto asset exchanges typically have the infrastructure,they are not allowed to list security tokens on their exchanges. Regulated
exchanges, OTC markets, and proprietary trading systems (PTS), as
defined in the FIEA, on the other hand, are permitted to trade security
tokens but currently lack the required infrastructure.

3.2.1. Exchanges for tokenized securities and electronically recordedtransfer rights
The FIEA defines a financial instruments market as a market for thepurchase and sale of securities and market derivatives.78 Accordingly, thedefinition comprises markets for tokenized securities and electronicallyrecorded transfer rights as defined in section 1.2 above. Persons who
intend to operate a financial instruments market must obtain a license by
the FSA. 79 Something different only applies to the operators of OTC
markets and PTS.

77 I-1-2-2(1) Guidelines: Crypto Asset Exchanges.
78 Article 2(14) FIEA.
79 Article 80(1) FIEA.

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Financial Instruments Exchanges: Under the FIEA, a financial instruments
exchange may only be established and operated by (i) a financial
instruments membership corporation or (ii) a stock company.80
A financial instruments member corporation is a legal entity establishedby a FIBO to operate a financial instruments exchange. Membership in
financial instruments member corporations is restricted to FIBOs only.81 If
the number of members falls below six members, the financial
instruments member corporation must be dissolved.82 The same applies
if the corporation is not granted a financial instruments exchange licenseby the FSA.83 Unlike financial instrument exchanges established by stockcompanies, exchanges established by financial instruments member
corporations may not be operated for profit.84
Stock companies establishing a financial instruments exchange must havea stated capital of at least JPY 1 billion. 85 Shareholders are generally
prohibited from holding 20 percent or more of the total voting rights.86
Out of the five stock exchanges in Japan, two are established as financial
80 Article 83-2 FIEA.
81 Article 91 FIEA.
82 Article 100(1)(iv) FIEA.
83 Article 100(1)(vii) FIEA.
84 Article 97 FIEA.
85 Article 83-2 FIEA, Article 19 Order for Enforcement of the FIEA.
86 Article 103-2 FIEA.

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instruments member corporations – namely the Fukuoka Stock Exchange(FSE) and the Sapporo Securities Exchange (SSE) – and three as stockcompanies. The latter comprise the Tokyo Stock Exchange (TSE), theOsaka Stock Exchange (OSE), and the Nagoya Stock Exchange (NSE).
None of the existing exchanges has expressed the intention to establish
an exchange for tokenized securities and electronically recorded transfer
rights so far. Since this is unlikely to change any time soon, this opens
opportunities for challengers in the digital assets space.
OTC Markets: For securities not listed on a financial instruments exchange,
the FIEA provides that these securities may be traded on an OTC market
established by an authorized financial instruments firms association(SROs). 87 SROs are incorporated by FIBOs as general incorporated
associations 88 to ensure fair and orderly trading of securities andderivatives as well as to protect investors89. To be recognized as an SRO,
the association must be authorized by the FSA.90 Only then it may carryout the self-regulatory functions laid down in the FIEA91 and operate an
OTC market. Membership in an SRO is limited to FIBOs. 92 Similar tofinancial instruments exchanges operated by financial instruments
member corporations, OTC markets must not conduct business forprofit.93
Under the FIEA, SROs operating an OTC market are required to register
the class and issues of securities traded on the OTC market and make a
copy of the register available for public inspection.94 The SRO must further
disclose the trading volume and other particulars for each trading day andissue to its members and the public and report the same to the FSA.95
Securities traded on an OTC market may only be traded among themembers of the SRO either on their own account or as intermediaries. 96
Depending on its articles of incorporation, an SRO may prohibit its
members from taking purchase orders other than from professional

87 Article 67(2) FIEA.
88 Article 78(1) FIEA.
89 Article 67(1) FIEA.
90 Article 67-2(2) FIEA, Article 78(1) FIEA.
91 Article 78(2) FIEA.
92 Article 68(1) FIEA.
93 Article 67-7 FIEA.
94 Article 67 FIEA.
95 Article 67(19) and 67(20) FIEA.
96 Article 67(2) FIEA.

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investors.97
Currently, the only eligible SRO, the Japanese Securities Dealers
Association (JSDA), does not operate an OTC market. The Japan STO
Association, which currently applies to become the SRO for security
tokens and comprising of six major Japanese brokerages, has not
expressed the intention to operate an OTC market for tokenized securities
or electronically recorded transfer rights yet.
PTS: PTS are similar to Alternative Trading Systems (ATS) in the U.S. andMultilateral Trading Facilities (MTF) in the EU. They were introduced in1998 to improve investor confidence through competition and to respondto investor demands for more options. Until then, listed securities could
only be traded on financial instruments exchanges.
A person operating a PTS conducts financial instruments business within
the meaning of the FIEA98 and must, therefore, register as a type I FIBO
with the FSA.99 According to the FIEA, the prices for securities traded on
the PTS must be determined by one of the following methods100:
(i)
(ii)
(iii)
(iv)
(v)

(vi)

methods that use the trading price of securities listed on afinancial instruments exchange
methods that use the trading price published by the financial
instruments dealer association for securities traded OTC
methods that use the price negotiated by buyer and seller
methods that use prices indicated by a buyer and a seller and thatmatch corresponding orders101
methods by which the operator of a PTS offers ask or bid prices
on its own or through price feeds of other FIBOs excluding suchcases in which the FIBOs are legally obliged to constantly quote
bid and ask prices (so-called market-making method)102
double auction methods

For PTS using a double auction method for price discovery, there arecertain restrictions. According to the FIEA Enforcement Order, theaverage daily trading volume of listed securities on PTS may not exceed acertain percentage of the average daily trading volume on all financial
instrument exchanges and OTC markets. Broadly speaking, the thresholdis 1 percent of the total average daily trading volume for all securities

97 Article 67(3) FIEA.
98 Article 2(8)(x) FIEA.
99 Articles 28(1)(iv), 29 FIEA.
100 Article 2(8)(x) FIEA.
101 Article 17(i) Cabinet Order on Definitions under Article 2 FIEA.

102

Article 17(ii) Cabinet Order on Definitions under Article 2 FIEA.

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listed on a financial instruments exchange or OTC market 103 and 10
percent of the total average trading volume for single securities listed ona financial instruments exchange or OTC market104. PTS exceeding thesethresholds must apply for a financial instruments exchange license.
Given the fact that there are no security token markets which areoperated by financial instrument exchanges or OTC markets, it is unclear
whether PTS can only determine the prices of security tokens inaccordance with the methods described under in item (iii) to (v) above.
Discussions are still ongoing, and the outcome is not clear yet. The
argument for making PTS subject to the existence of financial instruments
exchanges and OTS markets – at least for the methods indicated under
items (i), (ii), and (iv) – is that the legislator only intended to increase
competition with existing markets, but not to establish an independent
framework for secondary markets. In order to maintain a level playing
field between traditional securities markets and markets for security
tokens, the same must apply to security token markets. On the contrary,it can be argued that the legislator only wanted to prevent liquidity
drainage from financial instruments exchanges. For securities not listed
on one of the licensed exchanges, such risk does not exist. Unlisted
securities, whether tokenized or not, may therefore be traded on PTS,
provided of course, the company establishing the PTS complies with otherrequirements laid down in the FIEA. The same applies to OTC markets.
Where none of them exist, the risk of liquidity drainage is effectively nonexistent.
Allowing FIBOs to operate PTS would also be in line with developments inother jurisdictions, namely the U.S., where crypto companies haveacquired ATS in the past to get access to the desired license and tooperate secondary markets for security tokens. Provided, the FSA follows
this approach, companies seeking to establish a trading platform forsecurity tokens by way of PTS must register as FIBO or acquire a company
already registered. Compared to obtaining the financial instruments
exchange license, this would most likely be the way to go for mostcompanies. It is reported that several securities companies intend to
jointly establish a new PTS securities company in 2020.

3.2.2. OTC
Proprietary trading of securities, and therefore also of tokenized securities
and electronically recorded transfer rights, does generally not constitute

103 Article 1-10(i) Order for Enforcement of the FIEA.
104 Article 1-10(ii) Order for Enforcement of the FIEA.

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financial instrument business under the FIEA. 105 Something different
applies, however, if the respective entity deals with an unspecified large
number of people with a certain degree of continuity.
Intermediary services for OTC trading also fall under the definition offinancial instruments business, so that it is necessary to register as a FIBO.

3.2.3. Professional Traders and Liquidity Providers
Proprietary trading on financial instruments exchanges and PTS isgenerally not regulated under the FIEA. This also applies to the vast
majority of liquidity providers. An exception is made, however, for highfrequency traders 106 which are not subject to other registration
requirements under the FIEA. These traders are required to register with
the FSA.107

3.3.

Derivatives
As indicated above, the FIEA distinguishes between market derivatives
transactions and OTC derivatives transactions. Market derivatives
transactions are such derivatives transactions that are conducted on afinancial instruments market. The focus here will be on OTC derivatives
transactions, i.e. derivatives transactions, which are performed on abilateral basis.
Entities engaging in crypto derivatives transactions engage in the financial
instruments business as defined in the FIEA 108 and must, therefore,
register as a Type I FIBO109. An exception is generally made for entities
engaging in crypto derivatives transactions with certain counterparties.110
This includes among others derivative transactions with type I FIBO andqualified institutional investors as defined in the Cabinet Order on
Definitions111 (e.g. financial institutions, high-net-worth individuals). The
same applies where the counterparties are equivalent to theaforementioned persons under the laws of another jurisdiction 112 or

105 For the definition of financial instruments business see Article 2(8) FIEA.
106 For the definition see Article 2(41) FIEA, Article 26 Cabinet Order on Cabinet Orderon Definitions under Article 2 FIEA.
107 Article 66-50 FIEA.
108 Article 2(8)(iv) FIEA.
109 Articles 28(1)(ii), 29 FIEA.
110 Article 1-8-6 Order for Enforcement of the FIEA.
111 Article 1-8-6(1)(ii) Order for Enforcement of the FIEA in connection with Article
15(1) and Article 10 Cabinet Order on Definitions under Article 2 FIEA.
112 Article 1-8-6(1)(ii) FIEA Enforcement Order in connection with Article 15(1) and
Article 10 Cabinet Order on Definitions under Article 2 FIEA.

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where the counterparty is a company with a stated capital of JPY 1 billion
or more 113 . While this seems to be good news, crypto derivatives are
explicitly excluded from the exemption.114 Companies engaging in crypto
derivatives transactions must therefore generally register with the FSA asa type I FIBO.115 Something different only applies in cases where a FIBO,
which conducts an OTC crypto derivatives business in Japan, executes
cover transactions with a person engaging in the crypto derivatives
business under the laws of another jurisdiction. Provided the foreign
entity does not conduct the crypto derivatives transactions from Japan, it
does not have to register as a type I FIBO in Japan.116
Except from this particular case, companies engaging in crypto derivatives
must register as type I FIBO in Japan.

Excursion: Margin trading
The maximum leverage for crypto derivatives transactions is 2x forindividuals. 117 For corporations, there is no maximum threshold. 118
Similar to margin trading on crypto asset exchanges, the ratio must be
determined by the service provider on a case-by-case basis. In theabsence of such a decision, the maximum leverage will be 2x for
corporate clients as well.119

4.

CUSTODY SERVICES – CUSTODIANS AND CRYPTOASSET EXCHANGESCrypto assets, tokenized securities, and electronically recorded transfer
rights all rely on some form of public key cryptography. The person
holding the private key corresponding to the public-key controls theassets. In most cases, the user does not hold the private key himself.
Instead, he transfers the control to an exchange or a wallet service
provider which introduces new risks. With the amendment of the PSA, thelegislator responded to these risks. It is possible that the regulator will

113 Article 1-8-6(1)(ii) FIEA Enforcement Order in connection with Article 15(2) Cabinet

Order on Definitions under Article 2 FIEA.
114 Article 1-8-6(1)(i) FIEA Enforcement Order.
115 See also IV-3-3-1(3) FIBO guidelines.
116 Ibid.
117 Art. 117(41) and (42) Cabinet Order on Financial Instruments Business.
118 Art. 117(51) and (52) Cabinet Order on Financial Instruments Business.
119 Art. 117(51) and (52) Cabinet Order on Financial Instruments Business.

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introduce similar obligations for security tokens in the future.

4.1.

Crypto Assets
The term crypto asset management is understood broadly and covers any
activity where a service provider controls the crypto assets of anotherparty.120 In cases in which the service provider holds the private key(s) ofa user, and is able to initiate a transfer of the crypto assets, the services
constitute crypto asset management services within the meaning of the
PSA and are subject to registration.121 Given the broad definition of crypto
asset management services, the term does not only cover traditionalcustody solutions, but also certain types of wallets that manage theirusers’ private keys.

Crypto asset custodians as defined above must not only manage thecrypto assets of their users separately from their own 122 , but also
separately from the other users’ assets to allow easy identification123. The
private keys controlling the users’ crypto assets must generally be
managed via devices which are permanently disconnected from the120 I-1-2-2(3) Guidelines on Crypto Asset Exchanges.
121 Article 63-2 PSA in connection with Article 2(7)(4) PSA; I-1-2-2(3) Guidelines on

Crypto Asset Exchanges.
122 Article 63-11(2) PSA.
123 Article 27(1)(i) Cabinet Order on Crypto Asset Exchanges.

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internet or by other methods that provide a similar level of security.124 It
is well possible that other solutions, such as multi-party computation(MPC), satisfy these requirements. Crypto assets which are held in hot
wallets, i.e. where the private keys are stored on devices that arepermanently connected to the internet, must be backed by thecustodian’s own funds. Under the PSA, custodians are required to holdthe same amount of the same crypto asset as their own assets in a cold
wallet or in a wallet secured by a method providing a similar level of
security, as the funds stored in a hot wallet. By way of example, if acustodian holds 1 BTC of the users’ funds in a hot wallet, it must hold thesame amount of BTC as its own assets in a cold wallet. The maximum
amount of users’ crypto assets which can be stored in a hot wallet islimited to 5 percent of the total assets under management.125
The same applies to crypto asset exchanges, which manage their users’
crypto assets. Additionally, exchanges may entrust their users’ crypto
assets to a trust company. Since all of the registered exchanges arecentralized exchanges, this applies to all of them. Decentralizedexchanges may not have to fulfill these requirements depending on the
degree of decentralization. For more information on the regulatory
treatment of decentralized exchanges click here.
With respect to exchanges managing their users’ fiat money, they muststore these funds separately from their own funds with a trust.126 In caseof insolvency, the funds, both crypto and fiat, are protected, and users of
the crypto asset exchange are given priority over the other creditors.

4.2.

Security tokens
For security tokens, no similar framework exists so far. It is possible that
future subsidiary legislation will provide for similar regulations as forcrypto assets – at least, in cases where a public blockchain is used. The
risk of losing funds is likely smaller, however, since the token will be issued
in a more controlled environment. Exchanges being hacked, may simply
issue new tokens or ask the issuer to issue new tokens and put the stolen
tokens/addresses on a blacklist.

124 Article 63-11(2) PSA in connection with Article 27(3) Cabinet Order on Crypto Asset

Exchanges; see also II-2-2-3-2(5) Guidelines on Crypto Asset Exchanges.
125 Article 63-11(2) PSA in connection with Article 27(2) Cabinet Order on Crypto Asset
Exchanges.
126 Article 63-11(1) PSA in connection with Article 26 Cabinet Order on Crypto Asset
Exchanges.

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5.

CONCLUSION
Irrespective of whether a token is a crypto asset under the PSA, atokenized security or an electronically recorded transfer right under the
FIEA, the market is highly regulated in Japan. What seems to be a
regulatory overkill, at first sight, is likely to help the market to mature in
the mid to long term. This will allow more institutional players to enter
the market and to increase their stake in the digital asset space.
Companies that intend to operate on the Japanese market are welladvised to analyze carefully whether their activities are regulated underJapanese laws. It should be noted that despite the tight regulations, there
is still plenty of room for companies to operate on the Japanese market
without a license. This is particularly true for companies that are licensed
under the laws and regulations of other jurisdictions or who are willing toenter into strategic partnerships with licensed Japanese entities. For somecompanies, these entities might even become attractive takeover targets.
If you want to learn more or should you need legal or regulatory advice,please feel free to contact us directly under s.saito@innovationlaw.jp.
To follow us on LinkedIn, please click here.

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CONTACTSo SaitoPartners.saito@innovationlaw.jp
Joerg Schmidt
Foreign Associate (not registered in Japan)
j.schmidt@innovationlaw.jp

DISCLAIMER
This article contains a high-level overview and is prepared for general information of our clients andother interested persons. The content has not been confirmed by the relevant authorities, but merely
contains information and interpretations that may be reasonably considered in accordance with theapplicable laws and regulations. The opinions expressed in this article are our current views and may
be subject to change in the future. This article is provided for your convenience only and does notconstitute legal advice.