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FINANCIAL SERVICES &TRANSACTIONS GROUP NEWSLETTERMay 2019

Revisions to Payment Services Act Provisions, etc.
on Crypto Assets1
Ken Kawai / Akihito Miyake / Shunsuke Aoki / Tomoyuki Tanaka / Takeshi Nagase / Keisuke Hayashi

On March 15, 2019, the Financial Services Agency (the “FSA”) submitted a bill (the “Bill”) to
the Diet for the revision of certain legislation governing virtual currencies, including the
Payment Services Act (the “PSA”), the Financial Instruments and Exchange Act (the“FIEA”), and the Act on Sales, etc. of Financial Instruments (the “ASFI”). The following is asummary of the key revisions proposed.
PSA Revisions(i)

Revision of the term “virtual currency” to “crypto asset”(ii)

Enhancement of regulation of crypto asset custody services(iii)

Tightening of regulations governing crypto asset exchange services

FIEA Revisions(i)

Establishment of “electronically recorded transferable rights” ("ERTRs") andregulations applicable thereto(ii)Introduction of regulations governing crypto asset derivative transactions(iii)

Introduction of regulations governing unfair acts in crypto asset or crypto asset
derivative transactions

ASFI Revisions(i)

Application of the ASFI to crypto asset sales and similar transactions

The Bill will come into force within a year of its introduction, upon its passage by bothchambers of the Diet. Once passed into law, the Bill will significantly reshape the regulatory

1

We have also issued a newsletter in Japanese on the same topic in April 2019, which can be found at the following
link (although this newsletter is not a literal translation of the Japanese newsletter):
https://www.amt-law.com/asset/pdf/bulletins2_pdf/190409.pdf©Anderson Mori & Tomotsune

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landscape surrounding crypto assets in Japan. This newsletter provides an outline of theBill.

１ General
The sale, exchange and similar transactions in respect of virtual currencies were first regulated inJapan when revisions to the PSA and the Act on Prevention of Transfer of Criminal Proceeds (the“APTCP”) came into effect in April 2017. These regulations provided a regulatory framework that
focused primarily on the protection of users through various requirements including minimum
capital, information disclosure, separation of assets under management, and system security,achieved via a system requiring the registration of virtual currency exchange service providers.
Provisions such as those requiring personal identification were also introduced to the PSA and
APTCP, to prevent money laundering and terrorist financing. However, several incidents involving
leakage of users’ virtual currency information exposed the inadequacy of the security systems
maintained by virtual currency service providers. Moreover, virtual currencies are being
increasingly used for speculative reasons, rather than as a means of settlement.
In light of this situation, the FSA in March 2018 established a “Study Group on Virtual Currency
Exchange Business, etc.” (the “Study Group”) to assess the adequacy of regulatory measures inaddressing issues surrounding virtual currency exchange services. This was followed by the
publication of the Study Group’s report (the “Report”) on December 21, 2018. Besides
summarizing the results of the Study Group’s deliberations, the Report also proposed a new legal
framework to govern virtual currencies2, which led to the introduction of the Bill. Tabled before theDiet on March 15, 2019, the Bill contains proposed revisions to the PSA (the “PSA Revisions”),
based mainly on the proposals in the Report. At the same time, the Bill proposes revisions to the
FIEA (the “FIEA Revisions”) and to the Act on Sales, etc. of Financial Instruments (the “ASFI
Revisions”), primarily for purposes of strengthening the regulatory framework surrounding
cryptocurrencies.
The following is a summary of the key revisions proposed under the Bill.
PSA Revisions
(i)
(ii)
(iii)

Revision of the term “virtual currency” to “crypto asset”
Enhancement of regulation of crypto asset custody services
Tightening of regulations governing crypto asset exchange services (“Crypto Asset
Exchange Services”)

FIEA Revisions
(i)
(ii)
2

Establishment of ERTRs and regulations applicable thereto
Introduction of regulations governing crypto asset derivative transactions

For more details, please refer to our firm’s newsletter entitled “Outline of the Report from the "Study Group on the
Virtual Currency Exchange Services", published in February 2019.

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(iii)

Introduction of regulations governing unfair acts in crypto asset or crypto asset derivativetransactions

ASFI Revisions(i)

Application of the ASFI to crypto asset sales and similar transactions

The key points of the respective revisions are discussed below.3

２ PSA Revisions
The PSA Revisions proposes the following changes to the current regulatory system governing
crypto asset exchange service providers (“Crypto Asset Exchange Service Providers”), both toenhance protection of users and to clarify the rules relating to Crypto Asset Exchange Service
Providers:(i) revision of the term “virtual currency” to “crypto asset”;(ii) enhancement of regulation of crypto asset custody services;(iii) expansion of grounds on which applications for registration as Crypto Asset Exchange
Service Provider may be rejected;(iv) introduction of a system of advance notification for any proposed amendment to certain
matters in respect of the relevant crypto asset, such as the name thereof;(v) introduction of regulations governing advertisement and solicitation in respect of Crypto
Asset Exchange Services;(vi) introduction of disclosure requirements where crypto assets are exchanged (or wherecertain similar transactions are undertaken) via the grant of credit to users;(vii) enhancement of the obligation on Crypto Asset Exchange Service Providers to preserve
users’ assets; and(viii) grant of rights to users to enable their receipt of preferential payment when claiming for the
return of crypto assets.
Each of these items is explained in more detail below.

2-1

Revision of the Term “Virtual Currency” to “Crypto Asset”
The term “kaso tsuka” (virtual currency) under the PSA is a direct Japanese translation of the term
“virtual currency”. This term has been used by the Financial Action Task Force and can also befound in many cryptocurrency-related laws across multiple jurisdictions, including Japan. As theexpression “crypto asset” has seen increased usage in recent international discussions, however,and because the term “virtual currency” could mislead the public into thinking that a legal currency
is involved, it has been proposed under Article 2, Paragraph 5 of the revised PSA to amend theterm “virtual currency” to “crypto asset”.
We note, however, that the existing definition of “virtual currency” will remain unchanged.

3This newsletter does not discuss those parts of the Bill that are not directly related to crypto assets.

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Accordingly, it is generally understood that the change in reference from “virtual currency” to“crypto asset” will result in no substantive change to the legal interpretation of the term. (Hereafter.
for purposes of this newsletter, the term “crypto asset” will be used.) With that said, Article 2,
Paragraph 5 of the revised PSA clarifies that the definition of “crypto asset” does not include assetsthat confer ERTRs (or so-called security tokens), referred to in Article 2, Paragraph 3 of the revised
FIEA. This clarification seeks to prevent any redundant application of the PSA to such assets.

2-2

Regulations on Crypto Asset Custody Services
The PSA currently provides that management of users' money or crypto asset in connection with (i)any sale or purchase of a crypto asset or exchange of a crypto asset for another crypto asset, or(ii) any intermediary, brokerage or agency service for the acts listed in item (i), constitutes provisionof a Crypto Asset Exchange Service.4 Based on this, it is generally understood that the mere act ofmanaging users' crypto asset and transferring such crypto asset to an address designated byusers (“Crypto Asset Custody Service”) does not constitute a Crypto Asset Exchange Service,provided none of the acts listed in items (i) and (ii) above is performed.
It was highlighted in the Report, however, that Crypto Asset Custody Services (“Crypto Asset
Custody Service”) share common risks with Crypto Asset Exchange Services (“Crypto Asset
Exchange Services”). These risks include leakage of users’ crypto assets (“User Crypto
Assets”), bankruptcy of service providers, and risks associated with money-laundering andterrorism-financing.
To address this, the PSA Revisions provides that managing crypto assets for the benefit of anotherperson constitutes a Crypto Asset Exchange Service, “unless otherwise specifically stipulated
under any other law in cases where the relevant management activity is performed in the course ofa business”. As a result of this provision, a Crypto Asset Custody Service would also constitute a
Crypto Asset Exchange Service, even if the Crypto Asset Custody Service does not involve any
acts listed in items (i) and (ii) above.5
Regarding the carve out encapsulated by the language “unless otherwise specifically stipulated
under any other law in cases where the relevant management activity is performed in the course ofa business”, it would seem, for example, that a trust company operating under the Trust Business
Act, or a trust bank operating under the Act on Engagement in Trust Business Activities by
Financial Institutions would not be required to undergo registration as a Crypto Asset Exchange
Service Provider.

2-3 Addition of the Reasons for Refusal of the Registration as Crypto
Asset Exchange Service Provider
Under the existing provisions of the PSA, membership in the Certified Association for Payment
Service Providers (the “PSP Association”) is not a prerequisite for registration as a Crypto Asset

4
5

Article 2, Paragraph 7, Item 3 of the PSA.
Article 2, Paragraph 7, Item 4 of the revised PSA.

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Exchange Service Provider.
The PSA Revisions, however, effectively reverses this by stipulating that an application forregistration as a Crypto Asset Exchange Service Provider may be rejected on the grounds that theapplicant is not a member of the PSP Association and has failed to establish (i) internal regulations
equivalent to the self-regulatory rules adopted by the PSP Association or (ii) comparable
compliance systems.6

2-4 Advance Notification for Proposed Amendment of Certain Matters(e.g., Name of the Relevant Crypto Asset)
The current provisions of the PSA requires a Crypto Asset Exchange Service Provider to provide a
post-factum notification to the FSA7 if there has been any change in the information described in
its registration application.8
By contrast, the PSA Revisions require a Crypto Asset Exchange Service Provider to notify the
FSA in advance before changing any of the following information set forth in its registration
application: (i) the proposed name of the relevant crypto asset, (ii) the terms of its crypto asset
exchange services and (iii) the means by which such services will be provided.9

2-5 Introduction of Regulations Governing Advertisement
Solicitation in respect of Crypto Asset Exchange Services
2-5-1

and

Disclosure Obligations in respect of Advertisements

Currently, advertisements and solicitation in respect of Crypto Asset Exchange Services are notregulated by the PSA. To address the potential risks to users that may arise from such lack ofregulation, the PSA Revisions require the following items to be disclosed in advertisements of
Crypto Asset Exchange Services by Crypto Asset Exchange Service Providers, in accordance withthe provisions of the relevant Cabinet Office Ordinance:10(i) the trade name of a Crypto Asset Exchange Service Provider;(ii) the fact that the service provider is a Crypto Asset Exchange Service Provider, together with
its registration number;(iii) the fact that the crypto asset does not constitute Japanese Yen or any other foreign currency;and(iv) the nature of the relevant crypto asset or such other information (as specified in the relevant
Cabinet Office Ordinance) necessary to enable users to form appropriate judgments on thecrypto asset.

6
7
8
9
10

Article 63-5, Item 6 of the revised PSA.
Such notifications are submitted to the FSA, as proxy for the Prime Minister.
Article 63-6, Paragraph 1 of the PSA.
Article 63-6, Paragraph 1 of the revised PSA.
Article 63-9-2 of the revise PSA.

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The PSA Revisions further subject the relevant person at the Crypto Asset Exchange Service
Provider responsible for any failure to make the required disclosure to punishment byimprisonment for a term not exceeding six (6) months or a fine not exceeding JPY500,000, or
both.11 Additionally, juridical persons (including corporations) are also subject to dual liability forsuch failure and are punishable by a fine not exceeding JPY500,000.12

2-5-2

Prohibited Acts in respect of Advertisements/Solicitation

As part of the new regulations on advertisements and solicitation, the PSA Revisions also prohibita Crypto Asset Exchange Service Provider or any of its officers from engaging in any of thefollowing:13
making any misrepresentation or representation under a Crypto Asset Exchange Agreement14
that is likely to lead to an inaccurate understanding of the nature or any other aspects of acrypto asset;15(ii) making any misrepresentation or representation in an advertisement concerning a Crypto
Asset Exchange Service that is likely to lead to an inaccurate understanding of the nature or
any other aspects of a crypto asset;(iii) making a representation under a Crypto Asset Exchange Agreement or in an advertisement
concerning a Crypto Asset Exchange Service, to induce the sale or purchase of a crypto asset
or the exchange of a crypto asset for another crypto asset that is (i) not for the purpose ofusing the relevant crypto asset as a means of payment, but (ii) for the exclusive purpose ofpromoting the interests in a particular crypto assets;(iv) Such other acts specified in the relevant Cabinet Office Ordinance as being likely to result in(i) insufficient protection of Crypto Asset Exchange Service users or (ii) inappropriate
performance or inadequate security in the performance of any Crypto Asset Exchange
Service.
(i)

Any person at a Crypto Asset Exchange Service Provider who engages in the act referred to initem (i) above is punishable by imprisonment for a term not exceeding one (1) year or a fine notexceeding JPY 3.0 million, or both.16 Additionally, juridical persons (including corporations) arealso subject to dual liability for such act and are punishable by a fine not exceeding JPY 200
million.17
Any person at a Crypto Asset Exchange Service Provider who engages the act referred to in item(ii) or (iii) above is punishable by imprisonment for a term not exceeding six (6) months or a fine not

11
12
13
14

15

16
17

Article 112, Item 9 of the revised PSA.
Article 115, Paragraph 1, Item 4 of the revised PSA.
Article 63-9-3 of the revised PSA.
A “Crypto Asset Exchange Agreement” means an agreement between a Crypto Asset Exchange Service Provider
and a user of Crypto Asset Exchange Services under which Crypto Asset Exchange Services are provided to, orinterest in such services are solicited from, the user (Article 63-9-3, Item 1 of the revised PSA).
“Nature or any other similar items of a crypto asset” means nature or any other items of a crypto asset specified by
Cabinet Office Ordinance (Article 63-9-3, Item 1 of the revised PSA).
Article 109, Item 8 of the revised PSA.
Article 115, Paragraph 1, Item 2 of the revised PSA.

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exceeding JPY500,000, or both.18 Additionally, juridical persons (including corporations) are also
subject to dual liability for such acts and are punishable by a fine not exceeding JPY500,000.19

2-6 Introduction of Disclosure Requirements where Crypto Assets are
Exchanged (or where Certain Similar Transactions are Undertaken) via
the Grant of Credit to Users
To enhance the protection of users, the PSA Revisions require a Crypto Asset Exchange Service
Provider, when exchanging a crypto asset or when engaging in a similar act through the grant ofcredit to users, to take appropriate measures for the protection of users, such as disclosing certain
information regarding the relevant crypto asset exchange agreement or similar measures,
pursuant to the provisions of the relevant Cabinet Office Ordinance.20
Such “grant of credit” is understood to include the lending of crypto assets in addition to the lendingof money. Based on this, a Crypto Asset Exchange Service Provider that lends money or crypto
assets to users for purposes of enabling such users to buy or sell crypto assets is required to makeinformation disclosures pursuant to the PSA Revisions. (As a side note, any entity that wishes tolend money in the course of a business is also required to undergo registration as a moneylending
business.)

2-7 Enhancement of Obligation on Crypto Asset Exchange Service
Providers to Preserve Users’ Assets
2-7-1

Obligation to Entrust Users’ Money

The PSA currently requires a Crypto Asset Exchange Service Provider to manage users’ money
separately from the Crypto Asset Exchange Service Provider’s own money.21
Under the PSA Revisions, however, a Crypto Asset Exchange Service Provider is required to bothmanage the money of users separately from its own money, and to entrust users’ money to a trust
company or any other similar entity in accordance with the provisions of the relevant Cabinet Office
Ordinance.22 In other words, a Crypto Asset Exchange Service Provider is required not only to
manage the money of users in bank accounts separate from its own, but also to entrust suchmoney to a trust company or trust bank, acting as trustee.

2-7-2

Separate Management of Crypto Assets

The PSA currently requires a Crypto Asset Exchange Service Provider to manage a user’s crypto
assets separately from other User Crypto Assets, so as to enable identification of a user’s assets

18
19
20
21

22

Article 112, Item 10 of the revised PSA.
Article 115, Paragraph 1, Item 4 of the revised PSA.
Article 63-10, Paragraph 2 of the revised PSA.
Please refer to Article 63-11 of the PSA and each item of Article 20, Paragraph 1 of the Cabinet Office Ordinanceregarding Crypto Asset Exchange Service Providers.
Article 63-11, Paragraph 1 of the revised PSA.

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8from the assets of other users.23
In addition, the PSA Revisions require a Crypto Asset Exchange Service Provider to manage auser’s crypto assets24 separately from other User Crypto Assets in such manner specified in therelevant Cabinet Office Ordinance, in order to enhance the protection of users. Although therelevant Cabinet Office Ordinance has not yet been issued, we understand from the explanatory
material prepared by the FSA25 (the “FSA Explanatory Paper”) that a Crypto Asset Exchange
Service Provider will be required “to manage the crypto asset of users (other than crypto assets
required for the smooth performance of crypto asset exchange services) through highly reliable
methods, such as cold wallets.”

2-7-3

Crypto Assets for Ensuring Performance

Pursuant to the PSA Revisions26, a Crypto Asset Exchange Service Provider is required to (i) holdfor its own account crypto assets of the same kind and quantity as those User Crypto Assets thatare subject to “requirements specified by the relevant Cabinet office Ordinance as being necessaryfor ensuring users’ convenience and smooth performance of crypto asset exchange services”27(the “Performance Assurance Crypto Assets”), and (ii) manage Performance Assurance Crypto
Assets separately from its own crypto assets (other than Performance Assurance Crypto Assets).
Based on the FSA Explanatory Paper, User Crypto Assets managed in hot wallets are anticipatedto be subject to “requirements specified by the relevant Cabinet office Ordinance as being
necessary for ensuring users’ convenience and smooth performance of crypto asset exchange
services”. In other words, when a Crypto Asset Exchange Service Provider manages its User
Crypto Assets in hot wallets, the Crypto Asset Exchange Service Provider would likely be requiredto (i) hold its own crypto assets of the same kind and quantity as the User Crypto Assets managed
in hot wallets, and (ii) manage Performance Assurance Crypto Assets in cold wallets separatelyfrom its own crypto assets (other than Performance Assurance Crypto Assets). More details on thisare expected to emerge from upcoming discussions on the provisions of the relevant Cabinet
Office Ordinance.

2-8 Grant of Rights to Receive Preferential Payment with respect toUsers’ Claims for Return of Crypto Assets
As noted above, the PSA currently requires a Crypto Asset Exchange Service Provider to manage
User Crypto Assets separately from its own crypto assets. However, User Crypto Assets are
deemed under private law as nothing more than the Crypto Assets of the Crypto Asset Exchange
Service Provider that it manages on behalf of users. Accordingly, if the Crypto Asset Exchange
Service Provider goes into bankruptcy, users may not be able to claim the return of their crypto
assets, because such claims would be treated as general unsecured claims.
23
24

25
26
27

Article 63-11, Paragraph 1 of the PSA.
Other than crypto assets subject to “requirements specified by the relevant Cabinet office Ordinance as being
necessary for ensuring users’ convenience and smooth performance of crypto asset exchange services”.
The FSA Explanatory Paper can be found at: https://www.fsa.go.jp/common/diet/198/02/setsumei.pdf
Article 63-11-2 of the revised PSA.
Article 63-11, Paragraph 2 of the revised PSA.

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9With this in mind, the PSA Revisions stipulate that users who have delegated the management of
their crypto assets to a Crypto Asset Exchange Service Provider have the right, against the Crypto
Asset Exchange Service Provider, to claim preferential payment of such User Crypto Assets thatare managed separately from the service provider’s own crypto assets and Performance
Assurance Crypto Assets. Furthermore, users who have delegated the management of their crypto
assets to a Crypto Asset Exchange Service Provider will be entitled under the PSA Revisions toreceive payment in priority to general creditors, if the Crypto Asset Exchange Service Provider
goes into bankruptcy, except that such preferential right will automatically be subordinated to any
claim on the service provider’s estate.28
The PSA Revisions also require any person to whom a Crypto Asset Exchange Service Provider
sub-delegates the management of crypto assets, and any person affiliated with the Crypto Asset
Exchange Service Provider, to endeavor to provide such cooperation as requested by the FSA, inconnection with any exercise by users of the aforementioned preferential right.29

3-1

Electronically Recorded Transferable Rights

3-1-1 Introduction
Previously, Japanese regulators have been unclear on whether “initial coin offerings” (“ICOs”) and“security token offerings” (“STOs”), through which entrepreneurs issue electronic tokens and raise
funds from the public, are governed by the PSA or FIEA, or both. For this reason, prospective
issuers (including overseas issuers) of ICOs and STOs in Japan have faced significant uncertainty.
This has resulted in a virtual curtailment of ICO and STO issuances in Japan. To make mattersworse, a significant number of complaints (including complaints of fraud) have been filed in respectof white papers prepared by supposed ICO and STO issuers for investors in several jurisdictions,
including Japan. Common complaints include issuers’ failure to perform in accordance with therelevant white papers or to provide goods or services as promised.
To address this situation, the FIEA Revisions introduced the concept of ERTRs (electronicallyrecorded transferable rights) to clarify the scope of tokens governed by the FIEA.30 Consistent
with this, the PSA Revisions also exclude from the definition of “Crypto Assets” tokens that
represent ERTRs. It is therefore now clear that the PSA is inapplicable to tokens that are deemed
ERTRs.31 Additionally, as discussed in more detail below, there is now clarity that so-called “utility
tokens” issued under ICOs will continue to be governed by the PSA.

3-1-2 What are “ERTRs”?
ERTRs refer to the rights set forth in Article 2, Paragraph 2 of the FIEA that are represented byproprietary value transferrable by means of an electronic data processing system (but limited only
28
29
30
31

Article 63-19-2, Paragraph 1 of the revised PSA.
Article 63-19-3 of the revised PSA.
Article 2, Paragraph 3 of the revised FIEA.
Article 2, Paragraph 5, of the revised PSA.

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to proprietary values recorded in electronic devices or otherwise by electronic means), excluding
those rights specified in the relevant Cabinet Office Ordinance in light of their negotiability andother factors.32 Although the details of such Cabinet Office Ordinance have not been released, the
FIEA Revisions expressly stipulate that ERTRs will be treated as “Paragraph 1 Securities” (i.e.,
securities defined in Article 2, Paragraph 1 of the FIEA)33. To put it simply, rights treated as“Paragraph 2 Securities” (i.e., rights that are deemed securities pursuant to Article 2, Paragraph 2of the FIEA) and represented by negotiable digital tokens will be treated as Paragraph 1 Securities
unless they fall under an exemption. This suggests a focus on the generally high negotiability of
ERTRs, and the imposition of disclosure requirements in respect of ERTRs that are comparable tothose applicable to Paragraph 1 Securities, which are generally highly negotiable. On the other
hand, as the rights specified in the relevant Cabinet Office Ordinance in light of their negotiability
and other factors will continue to be treated as Paragraph 2 Securities, attention should be paid tothe scope of exemption to be specified in the relevant Cabinet Office Ordinance.
No special provision is stipulated in respect of Paragraph 1 Securities represented in digital tokens,such as shares of stock or bonds. However, given their nature as Paragraph 1 Securities, they will
likely be subject to the relevant FIEA disclosure requirements, even if they are represented indigital tokens.

3-1-2-1 ERTRs as Interests in Collective Investment Schemes
Although Article 2, Paragraph 2 of the FIEA refers to rights of various kinds, tokens issued in STOs
are expected to constitute, in principle, “collective investment scheme interests” ("CISIs") under
the FIEA.34 CISIs are deemed to be formed when the following three requirements are met: (i)investors (i.e., right holders) invest or contribute cash or other assets to a business, (ii) the cash orother assets contributed by investors are invested in the business, and (iii) investors have the rightto receive dividends of profits or assets generated from investments in the business. Tokens
issued under STOs would constitute ERTRs if the three requirements above are satisfied.
Notably, “investment contracts,” which are deemed “securities” under the U.S. Securities Act, aregenerally understood as being equivalent to CISIs under the laws of Japan, although the scope ofthe respective rights in respect of the two is not exactly the same. Specifically, investment
contracts for purposes of the U.S. Securities Act are deemed to be formed when the following
three requirements are met: (i) investors invest in a common enterprise, (ii) a reasonable
expectation of profits arises, and (iii) profits are generated solely from the efforts of others (theso-called “Howey test”). For this purpose, “profits” include not only profits arising from a common
enterprise (such as dividends), but also profits from capital appreciation. Accordingly, so-called“utility tokens” that are used solely to access an online platform or as a means of payment forgoods or services on the platform, but do not involve any payment of dividends of profits arisingfrom a common enterprise, may constitute investment contracts for purposes of the U.S. Securities
Act. Under the FIEA, by contrast, “profits” from CISIs are deemed to exclude profits from capital
appreciation. Accordingly, the aforementioned utility tokens, even if negotiable on exchanges, do
32
33
34

Article 2, Paragraph 3, of the revised FIEA.
Article 2, Paragraph 3 of the revised FIEA.
Article 2, Paragraph 2, Items 5 and 6 of the FIEA.

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not constitute ERTRs to which the FIEA is applicable (although such utility tokens may be deemed
Crypto Assets, to which the PSA is applicable).
On a related note, there had been discussions on whether tokens, issued under STOs that involvethe investment of Crypto Assets (such as bitcoins) in a business, constitute CISIs. This question
has arisen because Crypto Assets do not constitute “cash or other assets”, but has been resolvedby the FIEA Revisions, which provide that such “cash or other assets” include Crypto Assets.35

3-1-2-2 ERTR Represented by Proprietary Value Transferrable via
Electronic Data Processing Systems
An ERTR is required to be “represented by proprietary value transferrable by means of anelectronic data processing system (but limited only to proprietary values recorded in electronic
devices or otherwise by electronic means).” Since this language is consistent with the definition of
Crypto Assets (see Article 2, Paragraph 5 of the PSA), Crypto Assets that are transferrable on
blockchain (as is the case with bitcoins) may constitute ERTRs.
Incidentally, as stated above, ERTRs are expected to consist mainly of CISIs of some kind. It
should be noted, however, that CISIs as exemplified in Article 2, Paragraph 2, Item 5 of the FIFA(other than for membership interests in incorporated associations) are stipulated as contractual
rights under applicable laws and regulations. To transfer contractual status, the consent of thecounterparty to the contract is required.36 For example, where ERTRs represent the status ofsilent partners (tokumei kumiai-in) under silent partnership agreements (tokumei kumiai keiyaku)
as set forth in the Commercial Code, then even if such ERTRs are recorded on blockchain as
being transferred from the assignor to the assignee, the status of the silent partners would not be
deemed to have been transferred as a matter of course to the assignee if the consent of theoperator (eigyo-sha), who is the counterparty to the contract, has not been obtained. This issue
needs to be resolved. A possible resolution is to provide in the relevant silent partnershipagreement that the operator will be deemed to have provided its consent to a transfer ofcontractual status, if a silent partner transfers its contractual status on blockchain.

3-1-3
3-1-3-1

Disclosure Requirements
Public Offerings and Private Placements

As a result of the application of disclosure requirements to ERTRs37, issuers of ERTRs are inprinciple required, upon making a public offering or secondary distribution, to file a securities
registration statement38 and issue a prospectus39. Any person who causes other persons toacquire ERTRs or who sells ERTRs to other persons through a public offering or secondary
35
36

37
38
39

Article 2-2 of the revised FIEA.
Supreme Court Judgment of September 29, 1955, Minshu, Vol. 9, No. 10, p.1472, and Article 539-2 of the Amended
Civil Code.
Article 3, Item 3(b) of the revised FIEA.
Article 4, Paragraph 1 and Article 5, Paragraph 1 of the FIEA.
Article 13, Paragraph 1 of the FIEA.

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distribution must deliver a prospectus to such other persons in advance or at the same time.40
Although details of the relevant Cabinet Office Ordinance stipulating the matters to be stated insecurities registration statements and prospectuses for public offerings or secondary distributionsof ERTRs have not been released, such disclosure requirements are anticipated to be at a levelthat is higher, both qualitatively and quantitatively, than described in the relevant white papers in
respect of past ICO practice.
As these disclosure obligations will impose significant practical burdens, solicitation of buyers for
ERTRs under STOs that are launched after the coming into effect of the FIEA Revisions maylargely be conducted by means of so-called private placements to qualified institutional investors41
or private placements to less than 50 investors42, to avoid triggering such disclosure requirements.
Moreover, as solicitation of buyers for ERTRs is expected to be largely conducted via the Internet,
the issue of how to ensure that persons solicited on the Internet will be restricted to qualified
institutional investors or limited to 49 persons will have to be further considered.

3-1-3-2 Annual Securities Report and Semi-Annual Securities Report
An issuer who files a securities registration statement for a public offering or secondary distribution
of ERTRs will in principle be required to file annual securities reports and semi-annual securities
reports.43 Although details of the relevant Cabinet Office Ordinance stipulating the matters to bestated in the annual securities reports and semi-annual securities reports by ERTR issuers havenot been released, regular disclosure are expected to be required at a significant level, both
qualitatively and quantitatively, after the completion of an STO.
It should be noted that even if an issuer does not have to file a securities registration statement fora public offering or secondary distribution of ERTRs because it has implemented an STO through a
private placement or before the coming into effect of the FIEA Revisions (or for any other reason),if subsequently the number of ERTR owners as of the last day of any fiscal year is equal to or
higher than the number prescribed by the relevant Cabinet Order, the issuer will be required to fileannual securities reports and semi-annual securities reports for at least the next five consecutive
years, including the fiscal year in which the number of ERTR owners reach or exceed the relevant
threshold.44 The threshold prescribed by the relevant Cabinet Order is currently 1,000 ERTR
owners.45 To avoid triggering such filing requirements, continuous monitoring of the number ofright holders will be crucial after the completion of an STO.

3-1-4 Licensing (Registration) Requirements
As ERTRs are expected to constitute Paragraph 1 Securities46, registration as a Type I Financial
Instruments Business Operator will be required for purposes of selling, purchasing or handling the
40
41
42
43
44
45
46

Article 15, Paragraph 2 of the FIEA.
Article 2, Paragraph 3, Item 2(a) of the FIEA.
Article 2, Paragraph 3, Item 2(c) of the FIEA.
Article 24, Paragraph 1, Item 3 and Article 24-5, Paragraph 1 of the FIEA.
Article 24, Paragraph 1, Item 4 of the FIEA.
Article 3-6, Paragraph 4 of the FIEA Enforcement Order.
Article 2, Paragraph 3, of the revised FIEA.

©Anderson Mori & Tomotsune

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public offering of ERTRs in the course of a business.47 However, a Type I Small Amount Electronic
Public Offering Business Operator may conduct a public offering or private placement of ERTRs bymeans of so-called “crowdfunding” under less stringent registration requirements.48 The relevant
Cabinet Order currently provides less stringent registration requirements for STOs conducted bymeans of crowdfunding, where the total value of ERTRs issued is less than JPY100 million, andwhere the paid-in amount per buyer of ERTRs does not exceed JPY500,000.49
The FIEA Revisions prohibit Registered Financial Institutions (such as banks) that may engage incertain securities businesses from purchasing, selling or conducting any public offer of certain
ERTRs as prescribed by the relevant Cabinet Order.50 The degree of such prohibition will have to
be examined in detail when the relevant Cabinet Order is issued.
In connection with the above, we note that the FIEA Revisions do not amend the language in
Article 2, Paragraph 8, Item 7 of the FIEA, which provides the definition of “public offering” and“private placement”. Accordingly, any ERTR issuer who solicits acquisition of such ERTR (i.e.,undertaking an STO), will be required to undergo registration as a Type II Financial Instruments
Business Operator51, unless such issuer qualifies as a specially permitted business for qualified
institutional investors.
The provisions in the revised FIEA specifying that ERTRs constitute securities also expressly
provide that (i) a license for a Financial Instrument Market will be required for the establishment ofa trade market for ERTRs52, and (ii) registration as and authorization to conduct a Type I Financial
Instruments Business will be required for engaging in a “proprietary trading system (PTS) business”
involving ERTRs.53

3-2 Crypto Asset Derivatives Transactions
3-2-1

Introduction

Currently, crypto asset margin trading services are offered by many Crypto Asset Exchange
Service Providers. According to the Report, crypto asset derivatives transactions accounted forapproximately 80% of the total domestic crypto asset transactions conducted through Crypto Asset
Exchange Service Providers in fiscal year 2017. However, the FSA has received a significant
number of user complaints. These complaints relate mainly to defective systems and ambiguity inthe services of Crypto Asset Exchange Service Providers. Moreover, even though crypto asset
derivatives transactions are regulated in many major countries, they are not regulated in Japan.
Under these circumstances, it has been proposed in the FIEA Revisions to subject crypto asset
derivatives transactions to the FIEA in order to protect users and ensure that such transactions are
47
48
49
50
51
52
53

Article 28, Paragraph 1, Item 1 and Article 29 of the FIEA.
Article 29-4-2 of the FIEA.
Article 29-4-2, Paragraph 10 of the FIEA, and Article 15-10-3 of the FIEA Enforcement Order.
Article 33-1, Paragraph 1 and Article 33-1, Paragraph 2, Item 1 of the revised FIEA.
Article 28, Paragraph 2, Item 1 and Article 29 of the FIEA.
Article 2, Paragraph 14 and Article 80, Paragraph 1 of the FIEA.
Article 2, Paragraph 8, Item 10, Article 28, Paragraph 1, Item 4, and Article 29, Paragraph 30, Item 1 of the FIEA.

©Anderson Mori & Tomotsune

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conducted appropriately, by establishing certain regulations of crypto asset derivatives
transactions while, at the same time, requiring investors to take appropriate responsibility for suchtransactions. Specifically, for purposes of subjecting derivatives transactions involving "Financial
Instruments" or "Financial Indicators" to certain entry regulations and rules of conduct issued under
the FIEA, the FIEA Revisions has included “crypto assets (as defined in Article 2, Paragraph 5 of
the PSA)” and "standardized instruments created by a Financial Instruments Exchange forpurposes of facilitating Market Transactions of Derivatives by standardizing interest rates, maturity
periods and/or other conditions of (crypto assets)" (as defined in Article 2, Paragraph 24, Item 3-2of the revised FIEA) in the definition of “Financial Instruments,” and incorporated the prices,interest rates, etc. of crypto assets into the definition of "Financial Indicators" (Article 2, Paragraph
25 of the FIEA).

3-2-2

Crypto Asset Derivatives Transactions

For purposes of the FIEA, “Derivatives Transactions” is a general term encompassing Market
Derivatives Transactions, Over-the-Counter Derivatives Transactions and Foreign Market
Derivatives Transactions (Article 2, Paragraph 20 of the FIEA). By adding “crypto assets” to thedefinition of “Financial Instruments,” derivatives transactions related to crypto assets will be
subject to the provisions of the FIEA, regardless of the type of derivatives transaction involved. The
following section focuses on Over-the-Counter Derivatives Transactions (Article 2, Paragraph 22of the FIEA).
The following transactions are examples of Over-the-Counter Derivatives Transactions related to
crypto assets:54
・ Forward transactions (Article 2, Paragraph 22, Item 1 of the FIEA): transactions in which theparties promise to transfer crypto assets and the consideration therefor at a fixed time in the
future, and the parties may undertake cash settlement by transferring the difference in values
by reselling or repurchasing the underlying crypto assets.
・ Option transactions (Article 2, Paragraph 22, Item 3 of the FIEA): transactions in which theparties promise that one party would grant the other party an option to effect a transaction
involving a certain amount of crypto assets at a certain price between them only by a unilateralmanifestation of the other party's intention, and the other party pays the consideration for such
option, or any other similar transactions.
・ Swap transactions (Article 2, Paragraph 22, Item 5 of the FIEA): transactions in which theparties mutually promise that, using the amount they have agreed upon as the principal, one
party will pay an amount of money calculated based on the agreed upon interest rate, etc. of thecrypto assets, and the other party will pay an amount of money calculated based on the agreed
upon interest rate, etc. of the currency, or any other similar transactions.
In addition, as mentioned above, since the prices or interest rates, etc. of crypto assets areincluded in the definition of "Financial Indicators" (Article 2, Paragraph 25 of the revised FIEA), the54

We note, however, that Over-the-Counter Derivatives Transactions related to crypto assets are not limited to thesetransactions; instead they can be any type of transactions that falls under Article 2, Paragraph 22 of the revised FIEA.

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provisions of the FIEA will apply not only to derivatives transactions underlain by crypto assets, butalso to futures transactions, option transactions and swap transactions that use crypto asset
indices as reference indices.

3-2-3 Licensing (Registration) Requirements under the FIEA
Since crypto assets will be included in the definition of Financial Instruments, the conduct ofOver-the-Counter Derivatives Transactions related to crypto assets or intermediary (baikai) or
brokerage (toritsugi) activities in relation thereto will also constitute Type I Financial Instruments
Business (Article 2, Paragraph 8, Item 4, and Article 28, Paragraph 1, Item 2 of the FIEA).55
Accordingly, business operators engaging in these transactions will need to undergo registration
as Financial Instruments Business Operators (Article 29 of the FIEA) in the same way as business
operators engaging in foreign exchange margin trading (FX trading).
In addition, any person who intends to become a Financial Instruments Business Operator
engaging in the Type I Financial Instruments Business is required to meet certain asset
requirements, including having:・ a stated capital of at least JPY 50 million (Article 29-4, Paragraph 1, Item 4 of the FIEA, Article
15-7, Paragraph 1, Item 3 of the FIEA Enforcement Order);・ net assets of at least JPY 50 million (Article 29-4, Paragraph 1, Item 5 (b) of the FIEA, Article
15-9, Paragraph 1 of the FIEA Enforcement Order); and・ a capital-to-risk ratio of at least 120% (Article 29-4, Paragraph 1, Item 6 (i), and Article 46-6,
Paragraph 2 of the FIEA).56
It bears noting that a business operator who intends to engage in any of the following businesses,
at the time of its application for registration as a Financial Instruments Business Operator, will be
required to state the following facts in the registration application form (Article 29-2, Paragraph 1,
Items 8 and 9 of the revised FIEA):(i)

if the business operator engages in the business of conducting an Act of Engaging in Financial
Instruments Transactions with regard to derivatives transactions related to Paragraph 2
Securities (but limited to those provided by a Cabinet Office Order) or rights in the Paragraph
2 Securities or Financial Indicators (but limited to the prices and interest rates, etc. of rights in
Paragraph 2 Securities and figures calculated based thereon), such fact; or(ii) if a business operator engages in the business of conducting an Act of Engaging in Financial
Instruments Transactions with regard to derivatives transactions related to crypto assets or
Financial Indicators (but limited to the prices and interest rates, etc. of crypto assets, andfigures calculated based thereon), such fact.
55

56

Market Derivatives Transactions and Foreign Market Derivatives Transactions, as well as all intermediary, brokerage,
agency services in relation thereto (including intermediary, brokerage, or agency services in relation to theentrustment of such transactions) are deemed Type II Financial Instruments Business.
In addition to the asset requirements above, requirements such as personnel requirements, corporate requirements,
requirements for the establishment of domestic sales offices or business offices, requirements for establishment ofinternal regulations, requirements as to major shareholders, and requirements as to concurrent businesses alsoneed to be satisfied.

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There are certain exemptions to the application of the FIEA provisions. For example, certain
Over-the-Counter Derivatives Transactions related to non-securities with certain derivatives
professionals (as defined under the FIEA) are exempted from the regulations. Furthermore, foreignbusiness operators may conduct certain limited activities in relation to Foreign Market Derivative
Transactions without having to register as Financial Instruments Business Operators (whichmeans such activities do not involve the conduct of Financial Instruments Business)

3-2-4

Rules of Conduct under the FIEA

Under the FIEA Revisions, derivatives transactions related to crypto assets that are engaged in by
Financial Instruments Business Operators will be deemed "Acts of Engaging in Financial
Instruments Transactions" (Article 2, Paragraph 8 of the revised FIEA). Therefore, suchtransactions will be subject to various rules of conduct under the FIEA, including the following(which may be revised by future government orders):
・・・・

rules prohibiting the provision of false information (Article 38, Item 1 of the FIEA);
rules prohibiting the provision of conclusive evaluations, etc. (Article 38, Item 2 of the FIEA);
rules prohibiting uninvited solicitation (Article 38, Item 4 of the FIEA);
rules requiring confirmation as to whether a customer is willing to be solicited (Article 38, Item 5of the FIEA); and・ rules prohibiting continuing solicitation (Article 38, Item 6 of the FIEA).
In addition, when a Financial Instruments Business Operator engages in any crypto asset
derivatives transaction with a General Investor (i.e., any person who is not a Professional Investor(Article 2, Paragraph 31 of the FIEA)), it will be required to deliver the following documents:

・ a document delivered prior to the conclusion of a contract (Article 37-3 of the FIEA);
・ a document delivered upon the conclusion of a contract and/or a report on the outstandingbalance of the transactions (Article 37-4 of the FIEA); and・ a document delivered pertaining to the receipt of a security deposit (Article 37-5 of the FIEA).

3-2-4-1

Loss-cutting Rules

Loss-cutting rules generally refer to a mechanism through which a transaction will be compulsorily
settled by a cross transaction to prevent any further losses if the appraised loss reaches a certain
level.
The FIEA imposes an obligation on Financial Instruments Business Operators to establish andobserve loss-cutting rules in connection with currency-related derivatives transactions withindividual customers (Article 40, Item 2 of the FIEA, Article 123, Paragraph 1, Items 21-2 and 21-3of the Cabinet Office Order on Financial Instruments Business, etc.).
It is expected that as a result of proposed amendments to the relevant government order, similar
regulations will apply to crypto asset derivatives transactions as well, although the FIEA Revisions©Anderson Mori & Tomotsune

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do not address this point.

3-2-4-2

Leverage Regulations

Leverage regulations generally mean regulations obligating business operators to require theircustomers to deposit margins of an amount that exceeds a certain ratio of the transaction amount(i.e., the notional principal). Leverage regulations are considered regulations operating under thebasic principle that Financial Instruments Business Operators should maintain margins at a levelthat will enable them to cope with daily market fluctuations in the relevant transactions. Suchregulations are necessary because of the risk that loss-cutting rules may not work properly in theevent of sudden market movements or other reasons, as a result of which customers exceeding
their margins may incur damage, and business operators may face risk management issues.
Moreover, highly-leveraged transactions could lead to excessive speculation, which would be
problematic57.
According to the Report, some business operators currently employ a maximum margin rate of 25
times in crypto asset margin trading. According to the Report, considering that fluctuations in theprice of a crypto asset are greater than fluctuations in a legal currency, it is appropriate to set a
proper upper limit taking into consideration the actual conditions of transactions.
As for currency-related derivatives transactions with retail customers, the FIEA imposes anobligation on the Financial Instruments Business Operators to require such customers to deposit a
margin in order to ensure that the ratio of the margin amount (i.e., the actual deposit amount) to thetransaction amount (i.e., the notional principal) is more than 4% (which is less than 25 times if
converted to a margin rate) (Article 38, Item 7 of the FIEA, Article 117, Paragraph 1, Items 27 and28, and Article 117, Paragraphs 7 and 8 of the Cabinet Office Order on Financial Instruments
Business, etc.).
It is expected that as a result of proposed amendments to the relevant government order, similar
regulations will apply to crypto asset derivatives transactions as well, although the FIEA Revisions
do not address this point. It should be borne in mind, however, that under the current margin
trading regulations and guidelines of the Japan Virtual Currency Exchange Association (the"JVCEA"), the PSP Association in connection with crypto asset exchange business under the PSA,
margin rates should in principle be four times or lower, and this may be taken into account when
specific provisions are promulgated by the relevant Cabinet Office Order.

3-2-4-3

Separate Management

In currency-related derivatives transactions, as a method of separately managing money or othersecurity deposit deposited by their customers, the FIEA imposes an obligation on Financial
Instruments Business Operators to entrust money to a trust company or a trust bank in order toensure that the money will be refunded to investors (Article 43-3, Paragraph 1 of the FIEA, and57

Page 50 of the paper entitled “A summary of the entry regulations and rules of conduct for derivatives transactions focusing on the Financial Instruments and Exchange Act and the Commodity Derivatives Act -” published by the
Financial Law Board on January 28, 2015. This paper can be found at: http://www.flb.gr.jp/jdoc/publication47-j.pdf©Anderson Mori & Tomotsune

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Articles 143 to 143-3 of the Cabinet Office Order on Financial Instruments Business, etc.).
It is expected that as a result of proposed amendments to the relevant government order, similar
regulations will also apply to the method by which deposit money will be separately managed in
the case of crypto asset derivatives transactions, although the FIEA Revisions do not address thispoint.

3-2-5

Duty to Explain

Since crypto asset derivatives transactions are transactions that could result in excessive
speculation, it is appropriate for service providers handling such transactions to fully inform theircustomers of the risks inherent in such transactions to ensure that individuals with insufficientfinancial resources or knowledge do not suffer damage thereby.
In light of the foregoing, certain special provisions concerning the crypto asset-related business(i.e., business involving Acts of Engaging in Financial Instruments Transactions, as defined in the
Cabinet Office Order related to crypto assets) will be added to Article 43-6 of the FIEA.
First, it is stipulated that when engaging in business related to crypto assets, Financial Instruments
Business Operators, etc. must explain the nature of crypto assets in accordance with theprovisions of the relevant Cabinet Office Order (Article 43-6, Paragraph 1 of the revised FIEA).
It is also stipulated that when executing an agreement or soliciting the execution of an agreement
to engage in acts related to crypto assets with or for the benefit of their customers in connection
with their business related to crypto assets, Financial Instruments Business Operators, etc. or theirofficers or employees must not make any representation that may mislead their customers about
the nature of crypto assets or other matters set forth in the relevant Cabinet Office Order (Article
43-6, Paragraph 2 of the revised FIEA).
The specific scope of business related to crypto assets and matters to be explained will be
stipulated in the relevant Cabinet Office Order.

3-2-6 Derivatives Transactions for Exchanging Crypto assets for Other
Crypto assets
Since crypto assets will be deemed a type of Financial Instruments, as noted above, derivatives
transactions related to crypto assets will also fall under the definition of Over-the-Counter
Derivatives Transactions (Article 2, Paragraph 22 of the FIEA). However, it is unclear at thisjuncture whether various types of crypto asset derivatives transactions involving the exchange of“crypto assets” for other “crypto assets” will be included in the definition of Over-the-Counter
Derivatives Transactions (i.e., whether they will be subject to regulations under the FIEA as
Over-the-Counter Derivatives Transactions). To include such derivatives transactions within thedefinition of Over-the-Counter Derivatives Transactions in the FIEA, it would be necessary to
stipulate, in the relevant Cabinet Order in accordance with Article 2-2 of the revised FIEA, whichcontains the wording “money referred to in the provisions of the relevant Cabinet Order or money©Anderson Mori & Tomotsune

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related to transactions under such provisions,” that crypto assets will be deemed money as
referred to in each item of Article 2, Paragraph 22 of the FIEA. Attention should be paid to whether
any measures will be considered to clarify this point in the relevant Cabinet Order.

3-2-7

Capital-to-Risk Ratio

Financial Instruments Business Operators engaging in the Type I Financial Instruments Business
are required to calculate their capital-to-risk ratio, and report such ratio at the end of each month aswell as when such ratio falls below 140% (Article 46-6, Paragraph 1 of the FIEA, and Article 179 of
the Cabinet Office Order on Financial Instruments Business, etc.). Additionally, such Financial
Instruments Business Operators must also maintain their capital-to-risk ratio at 120% or higher(Article 46-6, Paragraph 2 of the FIEA). Furthermore, Type I Financial Instruments Business
Operators are required, in a reasonable manner according to the type of business being operated,to monitor their market risk equivalent amount and counterparty risk equivalent amount every
business day, because information on such amounts is necessary for purposes of calculating theircapital-to-risk ratio (Article 178 of the Cabinet Office Order on Financial Instruments Business,etc.).
Although the method for determining the risk equivalent amounts necessary to calculate thecapital-to-risk ratio is stated in the public notice entitled “Establishment of Standards, etc. for
Calculation of Market Risk Equivalent Amount, Counterparty Risk Equivalent Amount and Basic
Risk Equivalent Amount of Financial Instruments Business Operators” in accordance with Article
178 of the Cabinet Office Order on Financial Instruments Business, etc., attention should be paid
to how the method of calculating risk equivalent amounts in connection with crypto asset
derivatives transactions will be stipulated in the amendment to the aforementioned public notice.

3-3

Regulations on Unfair Transactions Using Crypto Asset

3-3-1

Introduction

Under the FIEA, certain unfair acts related to securities transactions are prohibited and punishable
by penalties. However, crypto asset transactions are not subject to any such prohibition under the
existing provisions of the FIEA or PSA.
Nevertheless, according to the Report, cases of market manipulation by speculative groups incrypto asset transactions have been reported, and the Report suggested that certain restrictions
on unfair transactions equivalent to those applicable to securities transactions are also necessary.
Accordingly, the FIEA Revisions contains prohibitions against certain unfair acts (the conduct ofwhich is punishable by penalties) in respect of crypto asset spot transactions and crypto asset
derivative transactions, without limits as to the violating party. These prohibitions are intended toenhance protection of users and to prevent obtainment of unjust benefits.
However, insider trading is not regulated under the FIEA Revisions, due to difficulties with©Anderson Mori & Tomotsune

20

formulating a clear concept of crypto asset issuers and with the identification of undisclosed
material facts.

3-3-2

Prohibition of Wrongful Acts

Article 185-22 of the revised FIEA provides that “no person”58 shall conduct any of the following
acts in the sale or purchase of, or in any other transaction concerning, crypto assets (in-kind)59, orin any crypto asset-related derivative transactions, etc.60:(i) engage in wrongful means, schemes or techniques;(ii) acquire money or other property using a document or other means of communication that
contains misrepresentations on important matters, or lacks representation on material mattersnecessary for the avoidance of misunderstanding; or(iii) use false quotations in order to induce transactions.
Any person who engages in such prohibited acts is punishable by imprisonment for a term notexceeding ten (10) years or a fine not exceeding JPY 10 million, or both61. Such penalties will becompounded for any violation committed for the purpose of gaining property benefit, such that theviolating person will be punishable by imprisonment for a term not exceeding ten (10) years and afine not exceeding JPY 30 million62. Furthermore, juridical persons (including corporations) arealso subject to dual liability, and are punishable by a fine not exceeding JPY 700 million.63

3-3-3 Prohibition against Dissemination
Fraudulent Means, Assault or IntimidationofRumors,

Usageof

Article 185-23 of the revised FIEA provides that “no person”64 shall (i) disseminate rumors, use
fraudulent means, or commit assault or intimidation for purposes of selling or purchasing, or
engagement in any transaction in respect of crypto assets or for purposes of engagement in any
crypto asset derivative transactions and the like, or (ii) causing any fluctuation in the quotations of
any crypto asset, or in any option or index based on crypto assets.65
Any person who violates the above prohibition is punishable by imprisonment for a term notexceeding ten (10) years or a fine not exceeding JPY 10 million, or both.66 Such penalties will becompounded for any violation committed for purposes of gaining property benefit, such that theviolating person will be punishable by imprisonment for a term not exceeding ten (10) years and a
58

59

60

61
62
63
64

65
66

This indicates that all persons (without limit as to whether the violating party is a natural person or otherwise) arecovered under the scope of Article 185-22 of the revised FIEA.
“Other transactions” seem to assume not only exchange with other crypto asset, but also intermediary, brokerage oragency service for sales and purchase/exchange.
“Crypto asset-related derivative transactions, etc.” mean derivative transactions which are only related to crypto
asset or crypto asset-related financial indicators (only limited to crypto asset’s price and interest rates and any figures
calculated that are based thereof) (Article 185-22, Paragraph 1, Item 1 of the revised FIEA).
Article 197, Paragraph 1, Item 6 of the revised FIEA.
Article 197, Paragraph 2, Item 2 of the revised FIEA.
Article 207, Paragraph 1, Item 1 of the FIEA.
This indicates that all persons (without limit as to whether the violating party is a natural person or otherwise) arecovered under the scope of Article 185-23 of the FIEA Revisions.
Article 185-23 of the revised FIEA.
Article 197, Paragraph 1, Item 6 of the revised FIEA.

©Anderson Mori & Tomotsune

21fine not exceeding JPY 30 million.67 Furthermore, juridical persons (including corporations) arealso subject to dual liability, and are punishable by a fine not exceeding JPY 700 million.68

3-3-4

Prohibition against Market Manipulation

Article 185-24 of the revised FIEA provides that “no person”69 shall commit any of the following
acts for purposes of misleading other persons into believing that the sale and purchase of crypto
assets, crypto asset-related market derivative transactions or crypto asset-related
over-the-counter derivative transactions are thriving or otherwise misleading other persons about
the state of such transactions:(i) engage in fake sales and purchases;70(ii) engage in collusive sales and purchases;71(iii) entrust or accept any entrustment of fake sales and purchases or collusive sales andpurchases;72(iv) engage in market manipulation through actual sales and purchases;73 or(v) engage in market manipulation through representations and certain similar acts.74
Any person who violates the above prohibitions is punishable by imprisonment for a term notexceeding ten (10) years or a fine not exceeding JPY 10 million, or both.75 Such penalties will becompounded for any violation committed for the purpose of gaining property benefit, such that theviolating person will be punishable by imprisonment for a term not exceeding ten (10) years and afine not exceeding JPY 30 million.76 Furthermore, juridical persons (including corporations) arealso subject to dual liability, and are punishable by a fine not exceeding JPY 700 million.77*See below (page 26) for the list of wrongful acts and penalties.

4

Act on Sales, etc. of Financial Instruments

4-1 Introduction
As a result of the PSA and FIEA Revisions, the ASFI is also proposed to be amended to apply toacts that result in the acquisition of crypto assets. Without amendment of the ASFI, customers
wishing to claim against Crypto Asset Exchange Service Providers will be required to prove that

67
68
69

70
71
72
73
74
75
76
77

Article 197, Paragraph 2, Item 2 of the revised FIEA.
Article 207, Paragraph 1, Item 1 of the FIEA.
This indicates that all persons (without limit as to whether the violating party is a natural person or otherwise) arecovered under the scope of Article 185-24 of the revised FIEA.
Article 185-24, Paragraph 1, Items 1 to 3 of the revised FIEA.
Article 185-24, Paragraph 1, Items 4 to 8 of the revised FIEA.
Article 185-24, Paragraph 1, Item 9 of the revised FIEA.
Article 185-24, Paragraph 2, Item 1 of the revised FIEA
Article 185-24, Paragraph 2, Items 2 and 3 of the revised FIEA.
Article 197, Paragraph 1, Item 6 of the revised FIEA.
Article 197, Paragraph 2, Item 2 of the revised FIEA.
Article 207, Paragraph 1, Item 1 of the FIEA.

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the latter owe the relevant legal obligations under tort.78 To address this unsatisfactory situation,
the ASFI Revisions expressly imposes accountability on Crypto Asset Exchange Service Providers,
including presuming the amount of damages that such service providers would owe, in order toreduce the burden of proof on the part of service users.
Article 2, Paragraph 1, Item 6(c) of the revised ASFI provides that an act that results in theacquisition of “the crypto assets prescribed in Article 2, Paragraph 5 … of the Payment Services
Act” constitutes a “Sale(s) of Financial Instruments”. In addition, Article 2, Paragraph 2 of therevised ASFI provides that the ASFI applies to agency or intermediary services for acts that resultin the acquisition of crypto assets. Although crypto assets as referred to in the ASFI do not include
the ERTRs discussed in Section 3-1 above, they fall under Article 2, Paragraph 1, Item 5 or Item
6(a) of the ASFI because ERTRs are caught under all the items in Article 2, Paragraph 2 of the
FIEA and are in any case subject to the ASFI.
An outline of the provisions in the revised ASFI that relate specifically to the sale of crypto assets is
set forth below.

4-2

Accountability

4-2-1 Matters to be Explained
Article 3 of the ASFI imposes on financial instrument providers (including any person selling crypto
assets, and any person providing agency or intermediary service therefor, in the ordinary course ofbusiness) the obligation to explain to users of Crypto Asset Exchange Services “Important Matters”.
Paragraph (1) of the said article prescribes the following as constituting “Important Matters”:(i)where the relevant Sales of Financial Instruments involves the risk of loss of principal or loss
exceeding the initial principal, due directly to fluctuations in interest rates, currency values,
quotations on a Financial Instruments Market, or any other indicator, (A) the fact of such risk,(B) information on the relevant indicators, and (C) important aspects of the transaction
structure; and(ii) if the relevant sale of financial instruments involve the risk of loss of principal due directly tochanges in the condition of the business or property of the person carrying out the relevant
sale of financial instruments or changes in the condition of any other person, (A) the fact ofsuch risk, (B) information on the relevant person(s), and (C) important aspects of thetransaction structure.
Although item (i) above addresses the risk of price fluctuations in respect of financial instruments,
the details set forth of sub-items (A) through (C) above are necessary because crypto assets

78

Article 709 of the Civil Code.

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involve the risk of loss of principal directly as a result of fluctuations pertaining to “other indicators”(such as the price of Bitcoin in spot transactions), and loss exceeding the initial principal in crypto
asset-related margin transactions.
Although item (ii) above addresses the credit risk in respect of financial instrument providers, if aloss of principal or loss exceeding the initial principal will likely be incurred with respect to crypto
assets due to the bankruptcy (and similar events) of crypto asset providers, explanation of therelevant fact is required.
On the other hand, Article 3, Paragraph 5, Item 5 of the revised ASFI provides that the “important
aspects of the transaction structure” stated in (i)(C) above refers to “details of the rights indicatedin respect of crypto assets (or, if the relevant rights do not exist, such fact) and … details of theobligations to be assumed by the Customer as a result of Sales of Financial Instruments”. Although
the meaning of “details of the rights indicated on crypto assets” is not clear. In the case of Bitcoin,for example, “such rights do not exist” since Bitcoin holders do not acquire any specific rights.
Turning to the reference “details of the obligations to be assumed by the Customer” it would seemto mean both the obligation to pay fees (if any) and the obligation to provide additional security
deposit in the event of fluctuations in quotations.

4-2-2 Manner and Extent of Explanation
Article 3, Paragraph 2 of the ASFI requires explanations of any sale of financial instruments to beprovided in such manner and to such extent necessary to facilitate the understanding of a crypto
asset user, in light of his or her knowledge and experience, the condition of his or her property, or
the purpose for which he or she has concluded a contract for the purchase of financial instruments.
In this connection, Chapter II of the “Rules on Solicitation and Advertising, etc.” issued by the
JVCEA sets forth the relevant rules applicable to solicitation.

5

Transitional Measures

5-1

Crypto Asset Exchange Service
The transitional measures for Crypto Asset Exchange Services are stipulated in Articles 2 and 3 of
the Supplementary Provisions of the Bill (the "Supplementary Provisions"), which aresummarized below.
First, any person who actually engages in the business of managing crypto assets when theamendment act comes into force (except for businesses that are already regulated as crypto asset
exchange businesses) may engage in such business (but limited to businesses for the benefit ofusers within the scope of operations actually conducted when the amendment act becomes
effective) for 6 months from the effective date of the PSA Revisions (Article 2, Paragraph 1 of the©Anderson Mori & Tomotsune

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Supplementary Provisions). A person who files an application for registration within 6 months of theeffective date may engage in the business of managing crypto assets within the existing scope
until the relevant authorities decide whether to approve the registration. However, a person who is
not registered within 18 months of the effective date would be prohibited from engaging in suchbusiness (Article 2, Paragraph 2 of the Supplementary Provisions). This only applies to business
operators who (i) actually engage in the business of managing crypto assets and (ii) do not engage
in the crypto asset exchange business under current laws (i.e., those who only engage in Crypto
Asset Custody Services) when the amendment act takes effect. In addition, it should be noted thatsince the scope of business will be "limited to businesses for the benefit of users within the scopeof operations actually conducted when the amendment act becomes effective," activities such as
taking on new customers or handling new types of crypto assets after the effective date are notallowed, until such person is registered as a Crypto Asset Exchange Service Provider.
It is also worth noting that any person who engages in the business of managing crypto assets inthis way will be deemed a Crypto Asset Exchange Service Provider, and will be subject to theamended PSA and the APTCP (Article 2, Paragraph 3 of the Supplementary Provisions).
In addition, any person who engages in the business of managing crypto assets in the mannerstated above is required to report its trade name and address within 2 weeks of the effective dateof the Bill (Article 3, Paragraph 1 of the Supplementary Provisions). The transitional measures
mentioned above will not apply to any person who fails to make such report or who makes a false
report (Article 3, Paragraph 2 of the Supplementary Provisions).

5-2

Financial Instruments Business
The transitional measures for the Financial Instruments Business, stipulated in Articles 10 to 13 of
the Supplementary Provisions, are summarized below.
First, in respect of public offerings (primary or secondary) of securities related to ERTRs that arecommenced before the effective date of the Bill, the provisions in force will remain applicable(Article 10 of the Supplementary Provisions).
Second, any person who actually engages in the Financial Instruments Business (except forbusinesses that already fall under Financial Instrument Business) when the FIEA Revisions comeinto force may engage in such business (but limited to businesses for the benefit of users within
the scope of operations related to the Financial Instruments Business actually conducted when theamendment act becomes effective) for 6 months from the effective date (Article 11, Paragraph 1 of
the Supplementary Provisions). A person who files an application for registration within 6 months ofthe effective date may engage in the Financial Instruments Business within the existing scope until
the relevant authorities decide whether to approve the registration. However, a person that is notregistered within 18 months of the effective date would be prohibited from engaging in the
Financial Instruments Business (Article 11, Paragraph 2 of the Supplementary Provisions).

©Anderson Mori & Tomotsune

25

Moreover, it should be noted that, as with the transitional measures for crypto asset exchange
business, activities such as taking on new customers or handling new types of crypto assets after
the effective date are not allowed until registration for the relevant Financial Instruments Business
Operator is approved.
It should be noted that a person who engages in the Financial Instruments Business in this manner
will be deemed a Financial Instruments Business Operator, and will be subject to the revised FIEA
and the APTCP (Article 11, Paragraph 3 of the Supplementary Provisions).
In addition, any person who engages in the Financial Instruments Business in the manner
described above will be required to report its trade name and address within 2 weeks of theeffective date of the Bill (Article 12, Paragraph 1 of the Supplementary Provisions). The transitional
measures mentioned above will not apply to any person who fails to make such report or who
makes a false report (Article 12, Paragraph 2 of the Supplementary Provisions).
Furthermore, transitional measures for the registration of changes under Article 31, Paragraph 4 of
the FIEA will also apply to Financial Instruments Business Operators who engage in the businessreferred to in Article 29-2, Paragraph 1, Items 8 and 9 of the revised FIEA, when the amendment
act comes into force (see 3-2-3 above) (Articles 13 and 14 of the Supplementary Provisions).

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©Anderson Mori & Tomotsune

26[List of wrongful acts and penalties](See sub-sections 3-3-2, 3-3-3 and 3-3-4)Type of acts

Provision under
the relevant
revisions

Specific prohibited acts
(i)
(ii)

Prohibited
wrongful acts

Article 185-22 of therevised FIEA

(iii)
Disseminationof rumors,fraudulence,commitment ofassault or
intimidation

Article 185-23 of therevised FIEA

Using wrongful means, schemes ortechniques;acquiring money or other property
using a document or other means ofcommunication containing
misrepresentations on materials
matters, or omissions of material
matters necessary for avoidance of
misunderstanding; orusing false quotations to induce
transactions.

Spreading of rumors, engagement infraudulence, commitment of assault or
intimidation





(i)

Marketmanipulationand certain
similar acts

Article 185-24 of therevised FIEA

Engaging in fake sales andpurchases;(ii) engaging in collusive sales andpurchases;(iii) entrusting or accepting entrustmentof fake sales and purchases orengaging in collusive sales andpurchases;(iv) engaging in market manipulation
through actual sales andpurchases; or(v) engaging in market manipulation
through representations and certain
similar acts.

Penalties

Imprisonment for term notexceeding ten (10) years
or a fine not exceeding
JPY 10 million, or both
If violation is committed
for purposes of gaining
property benefit,
imprisonment for term notexceeding ten (10) years
and a fine not exceeding
JPY 30 million.
Fine not exceeding JPY
700 million for judicial
persons (dual liability)©Anderson Mori & Tomotsune

27This newsletter is published as a general service to clients and friends and does not constitute legal
advice. Should you wish to receive further information or advice, please contact the authors as
follows:Authors:
Ken Kawai ()

Akihito Miyake ()

Shunsuke Aoki ()

Tomoyuki Tanaka (Takeshi Nagase (Keisuke Hayashi (

)
)
)



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