Current Situation ofJapanese VC Regulation
SO SAITOFOUNDER AND REPRESENTATIVE LAWYER
SO LAW OFFICEJULY 7, 20181

Speaker’s biography
Admitted to the bar in Japan (1999-) and in the State of
New York (2005-)
Founder and representative lawyer of So Law Office (2015-)

Legal Advisor to Japan Blockchain Association (JBA) (2014-)
Specialized in Crypto-related law since 20132

I Japanese Virtual Currency Act
The VC Act was enacted in April 2017 and is enforced in April
2017
Introducing "registration system"

16 companies have been registered including bitFlyer, Zaif,
QUOINE, DMM, GMO, SBI
4 companies (including Coincheck) are operating under
deemed registration (transitional measures)More than 100 companies are applying3

Trading Volume of Japanese Exchanges

https://jpbitcoin.com/market/volume

4

Market Entrants from Overseas
There are many applicants from overseas
They are from all over the world including the US, Europe,
Russia and former Soviet Union, and China

5Reasons for entry to Japan Market
Stability of the law
Large trading volume
Bank accounts are relatively easier to open

However, it is in question if the said perceived
advantages still remain
6II VC Exchange and Registration
VC exchanges are required to "register" with JFSA
Obligations: segregation of exchange’s asset andclients assets, compliance, internal audit,accounting audit, audit on segregation,accountability to users, KYC/AML etc.
7Definition of Type I Virtual Currency
Type I VC(i) financial value,(ii) recorded by way of electronic means,(iii) which may be transferred via electronic data processing system,(iv) which may be used to purchase goods or receive services from unspecified persons,(iv) which may be purchased from and/or sold to the unspecified persons,(iv) EXCLUDING any fiat currency (of Japan or otherwise) and assets denominated in any such
fiat currency.
→ Payment Type Coin: BTC, BCH, Ether, etc.

8Definition of Type II Virtual Currency
Type II VC(i) financial value,(ii) recorded by way of electronic means,(iii) which may be exchanged, as against unspecified person with any Type I VC(iv)EXCLUDING any fiat currency (of Japan or otherwise) and assets denominated in any such fiatcurrency.
→ Almost all alt-coins and ICO tokens are deemed, at least, as Type II VC→ Fiat denominated e-money such as Suica is not deemed as VC→ Some "securities" might fall in the definition of VC. In such case, both securities law and VClaw apply to such security tokens.

9Virtual Currency Act – Review becomes
Stricter
Original intention at the time of legislation in 2016
→ Enabling the startups to engage in VC business
Review became stricter in mid 2017 because of surge in VC prices◦ FSA’s special monitoring team was formed◦ Hundreds of questions are being asked when applying for registration

10Virtual Currency Act – Review becomes
Stricter
Review becomes far stricter after the Coincheck incidents
Security, Advertisement, Operation, Internal Management,Insider, Anti-money laundering, Market Maneuvering
The required level is higher than that of Self-regulation
There are no new exchanges admitted since last December

11

Ⅲ Coincheck incident and afterwards
On January 26, 2017, NEM equivalent ofapproximately 58 billion yen was hacked fromCoincheck
Coincheck has repaid all stolen loss to its users with
JPY (1 NEM=88.5 yen, total 46 billion) from its ownasset
Many were surprised to find the scale of profitabilityof exchanges
12Coincheck incident and afterwards
The FSA’s Examination after the Coincheck incident◦ On 1st February, all registered exchanges and deemed registeredexchanges were ordered to report on system risks◦ On-site inspection is being conducted first on Coincheck,thereafter on each registered and deemed registered exchange◦ Business improvement order, business suspension order, refusal ofregistration were issued to exchanges

13

Coincheck incident and afterwards
JFSA Workshop on Virtual Currency Exchange Business (April2018 -)◦ Research group of experts

Japan Virtual Currency Exchange Association (April 2018 -)◦ Established as voluntary self-regulatory organization, butaiming to be legally-mandated SRO. 16 registered exchanges
currently join. Scope of self-regulation is being discussed
including, security, anti-money-laundering, market
manipulation, etc.
14

Ⅳ ICO Regulation
ICO is abbrevation of “Initial Coin Offering”
Fund-raising by selling so-called “coins” or“tokens”
Still remains global hot topics being followedwith growing enthusiasm

15

ICO regulation
In December `17 JFSA revealed its view torelevant parties that ICO tokens constitute, tothe extent they have the probability of being
listed later, "virtual currency“16ICO regulation"Registration of virtual currency exchange business" +"notification of coins" are required for ICO in Japan.
December `17 onwards no ICO was being launched as
unequivocally in compliance of the laws.

17ICO and Security Law
Some ICO tokens meet the definition of securities as well as thedefinition of VC
Definition of "Collective Investment Scheme" (CIS) – One of Type II
Securities(i) Raising "fiat" money,(ii) investment to some business,(iii) profit distribution to investors

18ICO and Security Law
In principle, Type II financial instrument business license isnecessary to sell CIS (either of a private sale, public sale,primary and secondary).

Both security regulation and VC regulation apply.
PTS (private trading system) license is necessary to operate
an electronic order matching system for securities (includingCIS). Tough burden.

19

Ⅴ Future Japanese virtual currency
exchange industry
The VC Act in Japan was perceived as advanced
and forward-looking when published

A lot has happened in one year thus the act
started to lag behind the fast-changing reality

20Future Japanese virtual currency
exchange industry
As drafted, the law was meant to promote
innovation, but as currently operated it is tofurther regulate the industry
How will it be operated going forward?

21