The Japanese have brought into force a new legislation treating digital currency as a legal payment method, from the beginning (1 April 2017) of this fiscal year. Bitcoins are now legal tender in Japan and are at par with other fiat currencies. This has been made possible by the passing of a new law called the Virtual Currency Act by the Diet. The Financial Services Agency announced that it is going to treat cryptocurrencies as legal tender from April 1st, 2017.
The Virtual Currency Act
This bill was primarily to revise portions of the Banking Act. The Virtual Currency Act serves to account for changes to the economy. It also strives to keep economy at par with technological developments.
Section 3 of this bill now includes wording on virtual currency and is being tentatively called the “Virtual Currency Act.”
According to global law firm DLA Piper, the amended parts of the Payment Services Act, which is a part of the Banking Act, defines digital currencies as “property of value,” that is useful for payment to unspecified persons, and is purchasable from and sellable to unspecified persons.
Important to note, the law does not require users of bitcoins to reveal the parties they transact with. This provision may be used to deal with ‘unspecified’ and probable criminals. This is in consonance with the legal theory that no one shall be compelled to be a witness against himself.1
The law explicitly finds a distinction between digital currency and electronic money. ‘digital currency’ is not the same as ‘electronic money’ because the former has no issuers and is usable by any accepting individual, whereas the latter has a specific issuer and is only usable by the issuer or authorized persons.
The new law seeks to regulate bitcoins and bitcoin exchanges by equipping the Financial Services Agency with the authority to conduct on-site inspections and issue administrative orders as and when needed. All bitcoin exchanges shall be required to register with the Financial Services Agency.
The recognition automatically brings in obligations to be fulfilled by banks, financial institutions and cryptocurrency exchange platforms. These institutions would be required to comply with stricter anti-money laundering and additional KYC requirements. The law also provides for annual audits in finance, technology and consumer protection principles.
Digital currency exchanges also have to comply with a few other restrictive regulatory requirements. One of them being the requirement to hold, at minimum, liquid capital of ¥10 million yen, worth approximately US$90,000. Also, exchanges have to prove that they possess requisite technology infrastructure, with measures in place to prevent leakage, identity theft, loss and damage of funds and other information.
Recall The Mt. Gox incident – the largest bitcoin hack ever? This legislation was drafted long back in 2013 and had been in abeyance for the past few years. Although Japan’s large population is technologically adept, and is already used to sending tokens and coupons between their smartphones, most Japanese had still not heard of Bitcoin until the Mt. Gox fiasco. Many were introduced to Bitcoin by seeing Mark Karpeles’ face on TV at courtroom trials.
Any profits arising from trading in cryptocurrencies can be considered “income from business activities or miscellaneous income”. The asset-like nature of bitcoins and other cryptocurrencies means that capital gains tax are applicable upon them in Japan.
Interestingly, the practice of levying 8% consumption tax on sale and purchase of bitcoins and other cryptocurrencies would not be leviable in Japan from 1st of July, 2017. This is due to the efforts of the Japanese government to reform its tax laws.
DLA Piper explains that “the taxation of virtual currencies is undergoing many developments in Japan,” and new accounting standards detailing the treatment of digital currencies for tax purposes are “anticipated in the near future.”
“While bitcoin exchanges would be exempt from consumption tax, the exchange of virtual currency for assets or services (i.e., when someone pays virtual currency to a seller of assets or services) is still subject to consumption tax in the same way as those transactions which are paid in traditional currency.”
Entry to the bitcoin market
The bill also revises the ‘Act on Prevention of Transfer of Criminal Proceeds’ requiring exchanges to implement a stricter KYC process. Consequently, opening an account at a bitcoin exchange has gotten more difficult.
New users would now need to answer a list of prescribed questions, things like profession and purpose fall within the purview. Users need to submit identification documents and wait a few days during which their profile is vetted. Registered address of new customers shall be verified by sending a postcard with a verification code.
Further, from the enactment date all exchanges are required to voluntarily apprise their user base with detailed corporate information, including but not limited to, their trading name and address, registration number, transaction content, as well as disclose all fees and costs to users. They must also keep separate accounts for fiat money and digital currencies, as well as undergo a regular audit. The auditing is to be done by a public certified accountant or audit firm at least once a year.
The Payment Services Act also introduces regulations “for the registration of all virtual currency exchange businesses,” DLA Piper explains, citing how this regulation is “consistent with the declaration made at the 41st G7 Summit at Elmau in 2015.”
“Currently, most Bitcoin-cash exchange services available in Japan are operated by Japanese companies. However, the amendment to the Act could be an opportunity for foreign VC-cash exchange service providers to expand their business into Japan, because the new registration system is also open to foreign entities.”
– DLA Piper Law Firm
All in all, a brave government has paved the way for a brave technology to take effect. Wishing more acceptance to blockchain and it’s users.
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