THIS IS FOR GENERAL INFORMATION purposes only. It does not constitute legal
advice thus may not be relied upon regarding a specific legal issue or problem.

January 15, 2018(ver 1.0 was written on July 20, 2017)
Guidance Note on the Japanese Virtual Currency Legislation and Overview on Registration
Requirement thereunder
So Saito
So Law Office1

Virtual Currency Legislation

1.1

History and statutory framework:
As Japan's regulatory response to the MtGox failure and the Financial Action TaskForce (FATF) guidance in 2015 recommending all virtual currency ("VC")
exchangers be registered or licensed and under the same scrutiny as financial
institutions, amendments to the "Act on Settlement of Funds" and the "Act on
Prevention of Transfer of Criminal Proceeds" (together with the ancillaryamendments to the relevant orders for enforcement, cabinet office ordinances, etc.,
the "VC Act" or the "Act" hereunder) came into effect as of 1 April 2017 (the"Effective Date").

1.2

Definition of Virtual Currency
Under the VC Act, the definitions of VC are in two-fold.
Under the VC Act the term "Virtual Currency" means;(i) financial value (recorded by way of electronic means in the electronic devices
etc., excluding any fiat currency or currencies (of Japan or otherwise) and assets
denominated in any such fiat currency) that may be used to pay for the goods
purchased or rent or the services received to/ as against unspecified person orpersons therefor and which may in itself be purchased from and/or sold to theunspecified person or persons (the "Type I VC").
(ii) financial value (recorded by way of electronic means in the electronic devices

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THIS IS FOR GENERAL INFORMATION purposes only. It does not constitute legal
advice thus may not be relied upon regarding a specific legal issue or problem.

etc. excluding any fiat currency or currencies (of Japan or otherwise) and assets
denominated in any such fiat currency) that may be exchanged as against
unspecified person or persons with any such financial value as set out inparagraph (i) above and that may be transported using an electronic dataprocessing system (the "Type II VC").
The Type I VC includes Bitcoin, Litecoin, Ether, and other VCs that can be used asa payment method.
The Type II VC may include the vast majority of altcoins, which cannot be used asa payment method at this moment but can be exchanged with Type I VC. A token
that can only be exchanged with Type II VC will not fall under the definition of theType II VC.
The definitions and their interpretation since December 2017 are the topmost focal
points among the ICO token practitioners.
Both definitions exclude an instrument that pegs to a fiat currency. Thus, even if
they use blockchain technology, coins such as the MUFG coin in Japan or Tether
will not be regarded as VC.
1.3

Definition of Virtual Currency Exchange Business
The definitions of the VC Exchange Business are as follows:
Under the VC Act, the virtual currency exchange business (the "VC ExchangeBusiness") means any of the following acts carried out on a regular basis:(i) Sale and purchase of VC (i.e., exchange between VC and a fiat currency) or
exchange of a VC into another VC;(ii) An intermediary, brokerage, or agency service for the acts described above (i);and(iii) Management (custody) of a fiat currency or VC on behalf of theusers/recipients in relation to the acts described above in (i) and (ii).
Below are some examples of business, which might be deemed as conducting VCExchange Business:

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THIS IS FOR GENERAL INFORMATION purposes only. It does not constitute legal
advice thus may not be relied upon regarding a specific legal issue or problem.

(a) Exchange in which users can sell and/or purchase VC from other users(b) Shop that sells and/or purchases VC(c) Operator of Bitcoin ATM(d) Operator of ICO (initial coin offering)(e) Brokerage firm that intermediates sales or purchase of VC
Below are some examples of businesses that do not fall under VC Exchange
Business:(a) Person who trades VC for his or her own investment purposes(b) Mining firm(c) Software developer(d) Wallet service provider who does not engage in VC sales/purchases
1.4

VC Act in a nutshell - Regulatory Scope
The Act requires operators of VC Exchange Business (the "VC Exchange BusinessOperators") to get registered with the Japanese Financial Services Agency (the"JFSA").VC Exchange Business Operators are under such duty, pursuant to theAct, as (i) customer identity verification, (ii) accountability to the customers, (iii)
segregation of customers' assets from the proprietary assets, (iv) bookkeeping, (v)compliance, (vi) internal audit, etc.
No person shall, without getting so registered with the JFSA, engage in the VC
Exchange Business. Foreign exchange without the registration is also prohibitedfrom conducting VC exchange business to Japanese residents.

1.5

Regulator's attitude to VC Exchange
Japanese government has long wanted to promote Fintech and new businesses.
The Act and the surrounding regulations have been set up after JFSA's series ofdiscussions over the year with VC exchanges that were themselves starting up.
Recently there seems to be a hardening of the attitudes of JFSA in operation of theVC Acts which is somewhat in line with, or presumably reflecting, the surge in priceand the change in the global regulatory climate re ICO.

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THIS IS FOR GENERAL INFORMATION purposes only. It does not constitute legal
advice thus may not be relied upon regarding a specific legal issue or problem.

1.6

No arbitrary powerRest assured the law is clear what it takes to get registered as VC exchange business
operators and JFSA has no arbitrary power groundlessly to refuse an application.
The regulatory environment in Japan is seen to be, and in fact is, a robust one andmore entrepreneurs are swarming.

Currently, there are sixteen licensees, andninety more prospective applicants are said to have approached JFSA to apply next
in a queue.
2

Registration Overview

2.1

Transition period
The Act availed certain interim measures for those VC Exchanges that started theirbusiness no later than 31 March 2017 (before the Effective Date). Since such graceperiod (of 6 months or otherwise) expired, unless the business operator applied for,and such application was officially received by JFSA on or before 30 September 2017,
doing VC Exchange Business without being registered is patently illegal. Other
early entrants must have filed with JFSA the Notification for Discontinuance ofServices/ Business.

2.2

Substantial work expected
The regulations on license and registration under VC Act generally are reasonable.
Having said that, the rules require some level of paperwork and subsequent
continuous monitoring and control of observance thereof.

2.3

Registration of foreign VC exchange
A foreign VC exchange has two ways for its business to get registered in Japan, i.e.,the offshore company itself gets registered or an affiliate/ subsidiary located inJapan registered.

To take the first way, VC Act requires that the foreign VC

exchange have a VC license in foreign jurisdictions. If it is not so licensed elsewhere,
the only possible way is to set up a joint-stock company (Kabushiki Kaisha) and get
it registered in Japan.

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THIS IS FOR GENERAL INFORMATION purposes only. It does not constitute legal
advice thus may not be relied upon regarding a specific legal issue or problem.

2.4

Prohibition of Business Non-registered also applies to Foreign VC Exchanges
As written in item 1.4 above, VC Act prohibits VC exchange business operation in
Japan without VC Exchange registration. Theoretically, an offshore VC exchange
may transact with Japanese residents who voluntarily approach it without being
solicited by it. However, the term "solicitation" in the context of "Internet," is broadlyinterpreted. Any offshore VC exchange that does not intend to get registered inJapan must effectively prevent all Japanese residents from transacting at its website.

2.5

Timeline
It is said to take three (3) to four (4) months from the start of the discussion with theregulator to file the official application for registration. The applicants are expected
to hear from the regulator in a month or two.

3Requirements

3.1

Minimum capital requirement and minimum financial status requirement
The Act requires VC Exchange has at least JPY 10 million capital and not in thestate of insolvency (i.e., liability should not exceed asset plus capital).
From our experience, the capital amount (JPY 10Mln.) is never enough for thenecessary setup. Even though the Act allows startup companies to enter this market,
such startups virtually need to be injected capital by way of certain reliable/stablefinancing such as early-stage investment to avoid insolvency.

3.2

Attachment documents to be submitted with registration application:
3.2.1. Oath declaring that none of the grounds for refusal of registration apply.
3.2.2

Directors' Certificate of Residence

3.2.3

Paper concerning use by director of original family name

3.2.4

Certificate that directors are under no adult guardianship and have nopending bankruptcy.

3.2.5

Directors' resume/CV5

THIS IS FOR GENERAL INFORMATION purposes only. It does not constitute legal
advice thus may not be relied upon regarding a specific legal issue or problem.

3.2.6

Shareholders Register (top 20), Articles of Incorporation, Certificate ofRegistration,

3.2.7

For foreign VC Exchanges: Certificate of Registration in the country ofincorporation

3.2.8

Latest Balance Sheet and Profit Loss Statement

3.2.9For companies with Accounting Auditor: Report of Accounting Auditor

3.2.10 Prospect of profit and loss for three fiscal years from the startup
3.2.11 Description of VC to be dealt in
3.2.12 Organization Chart (describing department in charge of Internal Controlfunction)
3.2.13 Resume/CV of a person responsible for the management of VC ExchangeBusiness3.2.14 Internal Rules concerning VC Exchange Business3.2.15 Contract forms for execution of VC Exchange Business3.2.16 Outsourcing agreement if any part of the VC Exchange Business is beingoutsourced
3.2.17 Name of the designated dispute resolution organization, if any, or complaint
resolution/dispute resolution
3.2.18 MiscellaneousWith respect to the item 3.2.14, VC Exchanges are generally required to submit morethan 20 rules and manuals.
3.3

Local director
The act requires Foreign VC exchange, which operates business through Japanesebranches to have a local representative who resides in Japan.
The Act is silent as regards Japanese VC exchange, but we understand that theregulator will require the Japanese VC exchange to have at least one director whoresides in Japan.

3.4

Local compliance officer to be stationed in the office

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THIS IS FOR GENERAL INFORMATION purposes only. It does not constitute legal
advice thus may not be relied upon regarding a specific legal issue or problem.

A VC exchange would need to retain a compliance officer and an internal controller
who understands Japanese laws (cf. alternatively, both functions may well be servedby one person single-handedly).
3.5

Physical office requirement
JFSA requires a VC exchange to have a physical office, not just an office address inJapan.

3.6

Segregation of assets
The Act requires such VC exchange that accepts deposit (in fiat or VC) to segregate
its assets from its users' assets. The VC exchange needs to deposit users' fiat
currency in a bank account under its name that is different from the bank accountinto which it deposits its operating money. The VC Exchange must segregate its
users' VC from its proprietary VC on the blockchain. The VC Exchange must ensurethat each user's fiat currency/ VC is immediately identifiable.

3.7

Audit
A VC Exchange must undergo an annual audit of its financial statements andsegregation of assets.

3.8

Customer identity verification
A VC exchange is obliged, under the Act on Prevention of Transfer of CriminalProceeds, to verify customers' identity before opening an account (suchauthentication is primarily made by sending a restricted-delivery mail to thecustomer) and set up a robust internal control for anti-money laundering.

3.9

Accountability to users:
A VC exchange must provide adequate explanation to its users for user protection,e.g.;-Unlike fiat currency, virtual currency is not guaranteed to be convertible tofiat currency-Any user must be fully informed of its transaction, the handling fees charged,

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THIS IS FOR GENERAL INFORMATION purposes only. It does not constitute legal
advice thus may not be relied upon regarding a specific legal issue or problem.

where it can file complaints-Users must be provided receipts by the VC where they deposit money, etc.
with the VC exchanges.

3.10

Information security
The VC exchanges must securely control their electronic information system so that
their VC and records are protected against constant cyber-attacks.

3.11Protection of personal information
The VC exchanges must ensure the protection of personal information they obtained.

3.12

Sensitive information
Sensitive information, amongst others, must be securely controlled thus should behandled with extra care.

3.13

Outsourcing
Certain operations may be outsourced to other VC exchanges.

Still, theresponsibility remains with the principal thus the VC exchanges must retain
authority to inspect and supervise such outsourced.
3.14

Bookkeeping
Each VC exchange must prepare books and keep the record regarding its business.
It should also file the business report with JFSA.

4

Procedure for Registration

4.1

Procedure Overview
Generally the registration process would proceed in the following order: (i) discussion
with a lawyer, (ii) first meeting with the JFSA, (iii) preparation and submission ofdraft application documents including internal rules, (iv) comments are received
from JFSA, applicants revise such drafts and submit them for further review andcomment by the JFSA (the stage (iv) is repeated several times), (v) official submission

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THIS IS FOR GENERAL INFORMATION purposes only. It does not constitute legaladvice thus may not be relied upon regarding a specific legal issue or problem.

of the application documents, (vi) further comments from JFSA are received and theapplication documents are revised accordingly, (vii) The application is officiallyaccepted and registration is made.
4.2

First JFSA meeting
Amongst others, the JFSA requires an exchange to submit the below-listed
information at the first meeting.
4.2.1

General Information about the Company
Names of shareholders, the names of directors, the expected number of staff,
the expected organizational structure, the name of the accounting firm, thecapital amount, the net assets, and the estimated income are required.

4.2.2

Intended Business
The kind of business that is contemplated to be conducted (such as Internet
Exchange, OTC, ATM)
Whether there is a leveraged transaction
Names of virtual currencies to be handled
Whether the company will accept deposits of money/VC from users
Intended start time for exchange business
Nature of target users (such as individuals, institutional investors, Japanese
residents, etc.)

4.2.3

Background of the Main Shareholder
Example background: "AAA Company is established in year BBBB, locatedin country CCC and operates DDD business. Net asset of AAA is EEE. The
capital of AAA is EEE. AAA would like to set up a VC exchange because[reasons to be described]…."4.2.4

Background of Directors and Important Officers

4.2.5

Information on the Virtual Currencies to be handled
Name of the virtual currency, unit, presence or absence of the trading market,supplying method, authentication method, usage, total supplied amount,market capitalization, max supply, current market price per unit, theexistence of an issuer, risk related to such VC.

9THIS IS FOR GENERAL INFORMATION purposes only. It does not constitute legal
advice thus may not be relied upon regarding a specific legal issue or problem.

5Conclusion
The setup is not without pains as discussed above.

However, the regulatoryenvironment in Japan is seen to be, and in fact still is, a robust one, and more
entrepreneurs are swarming. Currently, there are 16 licensees and 90 more
prospective applicants said to have approached JFSA to apply next in queue.
The Act and the surrounding regulations have not been set up, except for JFSA'sseries of discussions over the year with VC exchanges that were starting up. For
further development of VC, business self-regulation is being awaited across the globe
where public vs. private discussion alone would foster such workable self-regulationin the industry.
EOD10