April 27 2021
NFTs: An overview of the current state in Japan, the legal and regulatory environment, and thelatest guidelines by the JCBA and BCA

So & Sato Law Offices
So Saitos.saito@innovationlaw.jp
Shinpei Asanos.asano@innovationlaw.jp
Non-fungible tokens (NFT) have been a topic in the Japanese crypto industry since early 2018. With
the NFT craze in 2021, they have become increasingly popular and seen more mainstream adoption.
It does, therefore, not come as a surprise that the Japan Cryptocurrency Business Association (JCBA)
and Blockchain Contents Association (BCA), as two of the leading industry associations in Japan,
issued NFT guidelines more recently.
In this article, we are taking a closer look at the state of the Japanese NFT market and the legal andregulatory environment for NFTs while considering the JCBA and the BCA guidelines.
JCBA NFT-guidelines (April 2021, written in Japanese)
https://cryptocurrency-association.org/dl/nft_guideline202104.pdf
BCA NFT-guidelines (2nd edition) (December 2020, written in Japanese)
https://eb3d626b-4b51-42f2-b2d40f682cc5645e.filesusr.com/ugd/e9a87a_2028e5c7115d4fcd933e9f55e6262762.pdf

We have been advising leading blockchain gaming companies on NFTs and other NFT-related
matters since early 2018.
In case you are looking for more information on blockchain games and crypto art, you might findthe following two articles interesting.
Blockchain Games and the Japanese Law (November 2018, written in Japanese)
https://innovationlaw.jp/blockchain-games-under-japanese-laws/

1

Buyer Beware – Digital Art and Non-Fungible Tokens (NFT)
https://innovationlaw.jp/en/buyer-beware-digital-art-and-non-fungible-tokens-nft/

I.

The State of the Japanese NFT Market

1.

Blockchain Games

Traditionally, items purchased in a game could only be used within the game and not be transferred
to other players. This has changed with blockchain games, where game items are represented byNFTs. By allowing players to control the NFTs, they become able to buy, sell, exchange, and lend items
represented by NFTs to other players – even outside of the game. According to the JCBA, the use ofNFTs further ensures that the game assets do not disappear after the termination of the game. Whatis most likely meant is that the NFT does not cease to exist. Yet, it may lose its value as the represented
asset might not be used anymore due to the termination of the game.
Popular blockchain games on the Japanese market include My Crypto Heroes, Crypto Spells, andContract Servant.

Traditional online gamesi.

ii.

Blockchain games

In-game items do not exist outside of the game i. Users may transfer, sell, or lend game assets
and can generally not be transferred, sold, orrepresented by NFTs to other players of the gamelent freely to other players outside the game.

(Game Assets).

Game assets accumulated over time become

ii. Third parties can provide services using tokens.

unavailable and useless after the game is iii. As long as a blockchain exists, NFTs representing
terminated.

digital assets are permanently available.

Source: JCBA Guideline, page 4.

(1)

My Crypto Heroes

My Crypto Heroes by double jump.tokyo was released in November 2018. The game is an RPG in
which players can gather, build their character, and win items by completing challenges and fighting
enemies. Both heroes and items are represented by NFTs and can be freely transferred peer-to-peer
or traded on NFT markets.
My Crypto Heroes fast became the world’s number one blockchain game and still has the highest
number of (active) users and transactions.

2

(2)

Crypto Spells

Crypto Spells by Crypto Games is a card game in which players use cards represented by NFTs to fightwith the computer and other players. There are several ways to acquire new cards, including battles
and trading/exchanging them with other players within and outside the game.

(3)

Contract Servant

Contract Servant by Axel Mark is a card game in which players have a deck of eight cards (servants).
There are two types of servants – common servants and token servants, where the token servant isissued as an NFT. The tokens can then be traded among players through a market function. Players
are further able to earn rewards from league battles each week.

(4)

Other Notable Games

Other notable blockchain games in Japan are Crypton, Crypton Racing, and Brave Frontier Heroes.
Further, double jump.toyko launched MCH+, a blockchain game development program that is basedon the knowledge gained from My Crypto Heroes.

2.

Crypto Art

In February 2021, Christies sold a Beeple artwork for JPY 7.5 billion. The artwork itself is stored on
the InterPlanetary File System (IPFS) and represented by an NFT on the Ethereum blockchain. In Japan,a number of crypto art related services have been launched more recently. The major platforms arenanakusa, NFT Studio, and Token Link.

(1)

nanakusa

In March 2021, Smart App released nanakusa – a marketplace for crypto art. nanakusa allows crypto
artists to mint NFTs and sell crypto art via the platform. Purchasers of crypto art may further sellartworks – or more precisely, the NFT representing the artwork – via the trading platforms. From theinformation provided, it seems that royalties are paid to the crypto artists for all secondary sales.

(2)

NFT Studio

In March 2021, CryptoGames released NFT studio. The platform allows artists to mint NFTs on
Ethereum and Polygon for their crypto art. Similar to nanakusa, NFT studio includes features thatallow artists to participate in the price for secondary sales.

3

(3)

TOKEN LINK

In January 2021, Platinum Egg released Token Link, an NFT market for game items. Only a few months
later, in April, Platinum Egg implemented an auction mechanism for crypto art.

3.

NFT Market(1)

Coincheck NFT Market

In March 2021, Coincheck, the operator of one of the largest crypto exchanges in Japan, launched an
NFT market. Currently, the only NFTs listed on the market are from Crypto Spells and The Sandbox.
More NFTs will be listed in the future. The company has 2 million active users and hundreds of billionsof yen in crypto assets under custody. As such, Coincheck will be an important partner for content
providers and a gateway to the Japanese market for foreign projects.
When applying for listing, from our experience, projects must provide Coincheck with information
about the blockchain used, the primary sale, IP content, and, where applicable, transaction volumes
on other markets. As Coincheck is a member of the JCBA and a head of the NFT committee of theJCBA, it is also valuable to check JCBA guidelines in more detail.

(2)

Participation by Major Companies

While Coincheck’s NFT market is the first of its kind in Japan, other major companies, including
Mercari1, LINE2 and GMO Internet group3 have announced that they are considering launching their
NFT market. The entry of other major players is a clear sign that NFTs are gaining increasing
mainstream traction on the Japanese market.

II.

NFT Guidelines of Japanese Organizations

Currently, there are no laws and regulations that specifically deal with NFTs. Depending on theirdesign, NFTs may, however, fall under the definition of crypto assets, prepaid payment instruments,
or money orders under the Payment Services Act (PSA) or the Banking Act or constitute securities
within the meaning of the Financial Instruments and Exchange Act (FIEA). Whether this is the casemust be analyzed on a case-by-case basis. The guidelines prepared by the JCBA and the BCA aim toprovide some more clarity in this regard.
1 On April 2, 2021, Mercari announced that it established a new company to plan and develop

blockchain-related services, including NFTs.
2 LINE tweeted recently that it is building an NFT platform. The tweet states that it intends to build
services that make it easy to mint, buy, sell, and exchange NFTs.
3 GMO announced developing a marketplace that allows users to buy and sell NFTs representing
digital art and music from famous artists.
4

(1)JCBA guidelines

The JCBA is one of the leading industry associations in Japan. Its members range from crypto-asset
exchanges to other crypto asset service providers. The NFT committee of the JCBA issued NFT
guidelines on April 26, 2021. The guidelines are meant to provide local and foreign NFT issuers withmore clarity when applying for a listing on a Japanese NFT market.
Matters covered by the JCBA guidelines(1) Use cases of NFTs(2) Flowchart for determining whether NFTS fall under existing laws and regulations(3) Profit-sharing arrangements(4) Settlement(5) Gambling(6) Premiums and Representations Act(7) Anonymity and privacy(8) Security(9) User protection(10) Handling of new NFTs (type of NFT that requires careful handling)
The following chart provides a good overview of the key considerations when determining the legaland regulatory environment for NFTs.

5

Source: JCBA Guideline page 5.

In the case of blockchain games, it is also necessary to consider gambling laws. According to Japanesecriminal law, gambling is a criminal offense. It is defined as a game of chance where players can winmonetary prizes, except for small gifts. While the definition is rather blurry, NFT issuers implementing
mechanics similar to gatcha should consider gambling regulations carefully.
Blockchain games that include incentives for users, such as the free issuance of NFTs, must further
comply with the Premiums and Representations Act. The Premiums and Representations Act6

regulates the free provision of goods and services by a business which aims to induce potential
customers to buy the business's products or services.
The Premiums and Representations Act stipulates limits for lotteries, competitions, etc. While thetotal amount differs, the following limits must generally be considered for lotteries and othercompetitions.
Description

ExamplesThemaximum

amountofpremiums
Premiums

Premiums that are

Gifts to all(1) If the transaction price is less(general)offered to anyone

purchasers, gifts

than JPY 1,000, the premium

visiting a shop orto all visitors,

must not exceed JPY 200.

anyone purchasingetc.

goods or services.

(2) If the transaction price is JPY
1,000 or more, the premium
must not exceed 2/10 of the totaltransaction price.

Premiums

Premiums that areLotteries at the(1) If the transaction value is lessand prices

given to users as prices

store.

than JPY 5,000, the maximum(game of luckin a game of chance or

Quiz games andamount of the prize must not

and game ofskill.

other games

exceed 20x the transaction value.

skill)(2) If the transaction value is JPY
5,000 or more, the maximum
amount of the prize must notexceed JPY 100,000.
※Both are capped at 2% of thetotal transaction value.
Source: Prepared by our office based on the Consumer Affairs Agency website, etc.

The JCBA guidelines further provide that NFT issuers should implement measures that prevent users
from using NFTs for money laundering and terrorist financing; consider security risks for storing NFTs
and implement measures to deal with thefts or losses; properly explain to users that there is the riskthat the NFT might become worthless if the service is terminated; and consider that NFTs are highly
likely to be used for criminal purposes, including money laundering.
7(2)BCA guidelines

The BCA was established by SNS and gaming companies and is involved in a number of initiatives
aiming at the protection of minors and the elderly when using blockchain applications. On March 24,
2020, the BCA published the BCA guidelines on blockchain content (incl. NFTs) to protect consumers
and promote self-regulation. A revised version of the paper was published on December 25, 2020.
Matters covered by the BCA guidelines(1) Gambling(2) Premiums and Representations Act(3) PSA(4) FIEA(5) Prevention of scams and other fraudulent practices
The interpretation of the laws and regulations, including the PSA, FIEA, Gambling Laws, and Premiums
and Representations Act, is largely in line with the interpretation by the JCBA.
With respect to gambling, the BCA guidelines hold that blockchain games should avoid or at least
carefully consider implementing any of the following mechanics: (i) in-game gachas (vending machinetype mechanics) that issue NFTs or other in-game items; (ii) collection of fees to participate inrewards.; (iii) randomized creation and burning of NFTs and other in-game items with monetary
value; and (iv) collection of fees to participate in competitions where the collected fees are
distributed to the participants depending on their ranking.
The BCA guidelines further include self-regulation for member companies that include (i) theprohibition of loss compensation, (ii) the prohibition of insider trading, (iii) the monitoring andprevention of market manipulation, and (iv) the obligation to disclose material information to allusers.
In addition, the guidelines hold that the issuance of NFTs may involve scams and other fraudulentpractices, such as the termination of services shortly after selling the NFTs. To prevent fraudulent
practices, member organizations are advised to (i) provide all material information to their users, (ii)secure the necessary funds and resources to ensure that the content shown to the users is actually
delivered, and (iii) conduct test sales of NFTs and extensive beta-testing to enable users to understandthe content of the services and NFTs prior to the actual launch.

8III.

Future Issues

Given the fact that NFTs are a relatively new phenomenon that is still evolving, many issues are yet
solved. The following explanations are meant to provide some guidance for matters not included in
the BCA and JCBA guidelines but relevant for the industry.
(1) NFTs and External Services
In most cases, the data represented by NFTs is stored off-chain. This raises the question of how
consumers can be protected from later changes to the service and what companies can do to avoid
claims for damages. In the case of blockchain games, NFTs typically represent assets that are storedon the servers of the blockchain game company. If the company now decides to change its terms ofuse or to terminate its services, this may ultimately render the NFT worthless and, in some cases,non-functional. To ensure that the game company does not face any claims for damage, this scenario
must sufficiently be covered in terms of use. The same applies to crypto art, where the artworks are
stored on the servers of a marketplace. If the data is stored and subsequently deleted on theInterPlanetary File System (IPFS), the situation is much more unclear and requires furtherconsideration.
(2) NFTs and IPFor NFTs that are used for crypto art or in blockchain games, it is necessary to consider therelationship between the content provider and the holder of the NFT carefully. Two aspects are ofutmost importance. First, the rights that are represented by the NFT should be clearly stipulated in
the sales documentation of the initial sale. This also includes the question of how the rights
represented by the NFT are transferred. Second, the relationship between the off-chain data and theNFT, as well as the retention of the off-chain data, should be considered carefully to avoid potential
actions for damages. In cases where the content provider participates in all further sales, this should
be clearly indicated in the contract as well. In the future, it is possible to discuss what rights should
be granted as best practices.
(3) Issues concerning the trading of NFTs
If not explicitly provided in the contract, it is unclear under Japanese laws whether the rights
represented by an NFT – i.e., the economic substance – are transferred (i) if both parties agree to thetransfer and the transfer is recorded on the blockchain or (i) by mere agreement. To increase legal
certainty and to ensure that the data recorded on the blockchain accurately reflects reality, the termsof sale should clearly stipulate that transfers only become effective if it is recorded on the blockchain.
While there is no legal precedent, we believe that this solution is most practical and reflects theparties' intentions.
9(4) Taxation of NFTs
The taxation of NFTs another issue to be considered. In February 2019, the Japan Cryptocurrency Tax
Association (JCTA) found that the taxation of income from the sale of NFTs is "an issue that has notbeen clarified in tax law." The document finds, however, that "NFTs have an independent value, andif income is generated from the sale or exchange of NFTs, it will generally be taxed as miscellaneousincome."(5) Secondary distribution of NFTs and rewards for creators
For many projects, content creators are rewarded when a secondary sale takes place. Examples are
the above-mentioned nanakusa and NFT Studio, who both pay royalties to the content creator forsecondary sales. In other cases, the content creator might want to transfer all his IPs to achieve higherprices for the initial sale. It is likely that both models will exist side by side in the future, but bestpractices still have to evolve. Further discussions are necessary in that regard.

Disclaimer
The content of this article has not been confirmed by the relevant authorities or organizations
mentioned in the article but merely reflects a reasonable interpretation of their statements. Theinterpretation of the laws and regulations reflects our current understanding and may thereforechange in the future. This article does not recommend the use of or investment in NFTs. This article
provides merely a summary for discussion purposes. If you need legal advice on a specific topic,
please feel free to contact us.
EOD10