Summary
- Crypto featured as a policy issue during electioneering ahead of October 2024’s general elections.
- A period of political – and potentially economic – instability is expected as the ruling coalition seeks a third partner following a poor showing.
- Japan has long been a leader in crypto interest and adoption, but arguably its conservative attitude has slowed adoption.
- For further stories like this one, visit our Crypto in Action page.
How and why did crypto feature in Japan’s electioneering?
Several parties made election pledges related to crypto. The country’s main opposition party, the Constitutional Democratic Party of Japan (CDPJ), announced that it would review the crypto tax system and announced plans to create a legal framework for DAOs to better establish their status.
The CDPJ wasn’t the only party to raise crypto during electioneering. The most robust set of recommendations came from the Democratic Party for the People (DPP), a small centre-right party. It pledged to tax crypto assets separately, and to lower the tax on cryptocurrency gains to 20%. The DPP also announced its desire to enhance the country’s token economy, using NFTs and cryptocurrencies to invigorate the economy. Trading crypto assets would incur no tax liability, and the party pledged to introduce both cryptocurrency ETFs and digital regional currencies by local governments to stimulate local economies.
The long-time ruling Liberal Democratic Party (LDP), announced its own plans in the form of taxation system reform, the promotion of Web 3, and attempts to develop the sector through its gaming industry and development of Web 3 games.
What was the outcome of the elections?
Dogged by scandal and with the electorate suffering – particularly older voters – the effects of the rising cost of living, the LDP and its partner, Komeito, lost their parliamentary majority. Their intention is to find a third party to bolster their coalition and restore their majority. Concurrently, the CDPJ, secured a strong showing, increasing its number of seats to 148, 50 more than it secured in the last elections.
The situation marks the most significant setback for the LDP since 2009, when it lost its ruling position following more than five decades in power.
Is crypto legal in Japan?
Yes, crypto is legal. In the Chainalysis’ 2024 Global Adoption Index, Japan ranked 23rd globally in terms of adoption, alongside other East Asian nations, South Korea (19), China (20), and Hong Kong (29). It offers a clear, robust regulatory environment, but strict controls and conservative sentiments typically undermine wider adoption.
As of 2022, there were approximately 3.7 million active crypto asset accounts held in Japan, a fraction of the approximately 126 million-strong population.
What is the government’s stance on crypto?
Japan has long been one of the world’s most progressive jurisdictions in terms of crypto regulation and has been a frontrunner in crypto and blockchain adoption, reflecting its wider interest and prowess in technology.
The country’s large conglomerates have carved a niche in this area. SBI invests in Web3 companies globally. At the start of 2024,it announced its Digital Space Fund, a JPY100 billion (then-$660 million) fund, designed to support Web3 and AI start-ups. Sony recently unveiled its own blockchain, Soneium, which is designed to bring Web3 technologies into everyday use. Elsewhere, Nomura Holdings is branching into stablecoins. In May 2024, a partnership between itself, GMO Internet Group and Laser Digital Holdings was announced to explore issuing JPY and USD stablecoins in Japan.
These types of development can only happen with the right regulatory and policy frameworks in place. The LDP has published two Web3 papers, underscoring this continuing interest. The 2024 paper was titled “A New Era Where Technology Forms the Foundation of Society”, highlighting the general trajectory of policy, and in general, the papers have dealt with issues like NFTs, DAOs, and Japan’s role in implementing “responsible, technology neutral international recommendations.”
This latter point reflects Japan’s domestically robust stance on regulation. It was one of the world’s first to put stablecoin regulation into place (in 2022), along with a virtual asset framework. Subsequently, these have been used as guidelines for other jurisdictions.
The country, however, suffered two major hacks, which undermined confidence and interest in the sector on the part of both the population and the government. In response, the authorities tightened regulations and Japan’s socially conservative ideas dampened interest to some degree.
During 2024, the question of whether the government would authorize ETFs has been a major focus for the sector, with proponents arguing that this could help boost adoption. In September, news reports emerged suggesting that a review of the rules governing the crypto sector was under way.
What effect will the election outcome have?
It is interesting that crypto featured during electioneering, possibly reflecting an attempt on the part of opposition parties to woo the younger electorate, which has become increasingly disaffected with politics.
In the short term, the focus will be on stabilizing the political and economic sphere. The fiat, the Yen, fell in value following the results, and the business community is keen to see a swift resolution to the LDP and Komeito’s lack of a majority.
Assuming the parties find at least one, possibly two parties who will join the ruling coalition, policy focus will be on mending ties with the electorate, and seeking to prove that the LDP has put its various scandals behind it. Reducing the cost of living will be another area of focus.
As a result, little is likely to change in terms of crypto policy in the short term, unless another member of the ruling coalition has a specific crypto agenda. This is a possibility, with the DPP being touted as a potential coalition partner.
What is Japan’s attitude towards regulation?
Notably, Japan has never tried to ban or suppress the crypto sector, but instead opted for regulation. This reflects its robust financial workings and legal framework, as well as its interest in promoting technology based sectors.
The Japanese Financial Services Agency (FSA) regulates the crypto sector, alongside the Japan Virtual Currency Exchange Association (JVCEA) and the Japan Security Token Offering Association (JSTOA).
In terms of legislation, crypto falls under the Payment Services Act (PSA). The act covers cryptocurrency custody service providers, of which Japan only allows companies with a highly qualified financial bureau, while the Financial Instruments and Exchange Act (FIEA) covers cryptocurrency derivatives companies.
The country has a Minister for Digital Transformation, who at the time of writing (October 2024, having been appointed the previous month), is Masaaki Taira, the LDP’s former Web3 project team head. Minister Masaaki has previously called for reforms to the taxation of cryptocurrencies (which are as high as 55%), and the promotion of Web3 and blockchain. He has also suggested that Japan should use its gaming industry and specifically the development of Web3 games as an area of economic growth.
The country’s Ministry of Economic Trade and Industry has offered incentives to attract foreign Web3 companies, but notably, the Ministry of Finance is reputed to be more skeptical about the crypto sector. The FSA has been more interested in discussing crypto regulation and currently has a review under way into the sector.
Why do the authorities remain reticent while the industry calls for crypto ETFs?
The sector has, during 2024, lobbied for two major changes – a reduction in taxation or reclassification under the investment law (which would also serve to reduce taxation) and the approval of crypto ETFs. In October, a group of Japanese companies produced a series of recommendations based on ETFs. These would be traded on the securities market and treated as capital gains with a taxation rate of 20%.
The authorities remain cautious, which likely reflects a mix of social conservatism and the desire to protect investors. Japan has suffered several major crypto incidents. It was an early proponent of bitcoin mining and ran one of the world’s largest exchanges, Mt. Gox, which handled 70% of all bitcoin transactions. In 2014, it emerged that the exchange was involved in the theft of hundreds of thousands of bitcoin. The situation resulted in Mt. Gox’s bankruptcy and the loss of 7% of the world’s bitcoin supply. In 2018, Coincheck, one of the country’s largest digital currency exchanges, lost approximately $534 million-worth of virtual assets during a hack on its network. In 2024, cryptocurrency exchange, DMM Bitcoin, suffered a similar hack, resulting in losses of $308 million.
These high-profile incidents have created a natural reticence. Among the factors that the FSA will consider during its review, is whether existing crypto regulations offer sufficient protection for investors, and whether crypto should be reclassified as a financial instrument. In this case it would be covered by Japan’s investment law, potentially resulting in lower taxes for digital assets.
Timeline of main crypto events and legislation
February 2014 – It emerged that Mt Gox had ‘lost’ hundreds of thousands of bitcoin.
March 2014 – The authorities decided against regulating cryptocurrencies, but asked the industry to form an organization that would effectively do this.
May 2016 – The PSA was amended (coming into force the following year) to include virtual currency – thereby recognizing crypto as a type of money – in a bid to help develop the sector.
2017 – The trading volume of Japan’s crypto exchanges was the largest in the world.
2018 – Coincheck was hacked, with just under JPY 58 billion lost, leading to three years of tightening regulations on crypto exchanges and operations (including identity verification, record keeping and compliance).
2021 – Web 3 was declared one of the country’s national growth strategies. Stablecoins were introduced and pegged to the Yen.
2022 – The PSA and Banking Acts were amended to include stablecoin regulations, which came into force the following year.
September 2022 – The government awarded NFTs to several mayors for initiatives taken in the area they governed.
October 2022 – Then-prime minister, Fumio Kishida, announced plans to digitize national identity cards, a process involving issuing NFTs to local authorities.
May 2024 – DMM Bitcoin was hacked, with losses of approximately JPY50 billion.
September 2024 – The FSA announced plans to review the crypto sector.
Outlook
Japan remains a strong presence in the crypto and blockchain sectors and there’s little to suggest this is going to change. Reflecting both this, and possibly a generational divide (with parties seeking to attract younger voters), it is not that surprising that crypto found its way into election campaigning.
The fact remains that crypto’s development is not taking place as quickly as its proponents would like. Those in the sector continue to hope that the authorities will approve spot crypto ETFs, a move that they argue would give a renewed boost to crypto’s development in Japan. In this respect, another possible positive ‘signal’ could include the reclassification of digital assets.
Post-elections, however, there is little to suggest that crypto policy will radically change. Instead, observers can expect a continuation of Japan’s focus on Web3, and its generally measured approach, supported with robust legislation and regulation.
