A document published this November by the Japanese Financial Services Agency (FSA) further clarifies the governing body's stance on cryptocurrency.
The 42-page document contained a section that related to cryptocurrency regulation. As translated, the FSA statement holds that blockchain systems represent a hitherto unseen technology and that a main focus of the organization is to protect traders who frequently use cryptocurrency exchanges. To achieve a satisfactory level of protection, the FSA recommends "daily business management." In that vein, the FSA will continue to monitor the current marketplace for virtual currencies to better understand the impact it has on users.
The FSA also discussed crowdfunding through token issuance, saying that it would inform consumers about existing pitfalls. The organization said, "We aim to protect users through alerting attention to ICO risks."
In similar news, the Japanese Blockchain Association (JBA) recently issued a guidance to companies that engage in token offerings to Japanese citizens, which described an unfounded attitude that Japanese laws and regulations do not apply to businesses that crowdfund through token sales in Japan from outside the country. The JBA warns that a lack of "specific regulation regarding ICOs ... is different from no regulation at all as many of the token sales are securities and thus regulated under existing law."
The JBA said internet-based solicitation for token offerings is regulated under Japanese law. It recommended that issuers "shut out all Japanese residents from transacting on their site.”
According to the JBA, the following list of regulations are applicable, although not exhaustive:
"(1) ‘Virtual Currency’ Stipulated in PSA (called the VC Act)
(a) If ICO tokens are deemed ‘Virtual Currency’ (‘VC’) as defined in the VC Act, only registered Virtual Currency Exchange Business Operators are authorized to handle such ICO tokens.
(b) Even a registered VC Exchange Business Operator is not authorized to handle all existing VCs. The VCs to be handled should be reported to and, as a matter of practice, approved by the FSA.
(c) The criminal penalty for conducting a VC exchange business without registration is imprisonment for 3 years or less and/or a fine of 3 million yen or less.
(2) ‘Prepaid Payment Instruments’ Stipulated in PSA
(a) If ICO tokens are deemed ‘Prepaid Payment Instruments’ (‘PPI’) as defined in the PSA, registration with or notification to FSA is required depending on the type of PPI.
(b) The criminal penalty to issue PPI without registration or submission of appropriate notice is imprisonment and/or a fine.
(3) Fund Regulation in FIEA
(a) The fund regulations pursuant to the FIEA (the ‘FIEA Fund Regulations’) will apply, if the ICO constitutes a ‘collective investment schemes (fund),’ i.e., a scheme that is
(i) to collect money from others;
(ii) to invest in a business; and
(iii) to pay dividends to holders thereof.
(b) The seller of collective investment schemes is required to register as a Type II Financial Instruments Exchange Business Operator unless a certain exemption applies
(c) The criminal penalty to solicit investors to a collective investment scheme without registration is imprisonment for 5 years or less and/or a fine of 5 million yen or less.
(4) Specified Commercial Transaction Act
(a) If ICO tokens are not regulated under financial regulations such as the VC Act and FIEA, the Specified Commercial Transaction Act would generally apply to sales of ICO tokens via the internet.
(b) The Specified Commercial Transaction Act requires certain kinds of basic disclosure such as the name, address and telephone number of a person who is in charge of sales, price, payment method, limitation of warranty (if applicable), etc. Further, the Specified Commercial Transaction Act prohibits some acts such as an extravagant advertisement.
(c) The criminal penalty for an extravagant advertisement is a fine of 1 million yen or less. If the person who makes an extravagant advertisement did not provide basic disclosure items, the penalty for that person will be imprisonment for 1 year or less and/or a fine of 2 million yen or less.
(5) Consumer Protection Act
(a) From the general consumer protection point of view, an appropriate explanation to investors is required irrespective of whether or not such ICO tokens are regulated by the VC Act, by the FIEA or by the Specified Commercial Transaction Act.
(b) The consumer can cancel the purchase of ICO tokens if there is a lack of appropriate explanation as required by the Consumer Protection Act."
Blockchain technology has swung open the doors of a new marketplace and it will take time for regulatory bodies to adjust. While regulators decide how to forge policies, they must continue to balance the interests of the consumers they are charged to protect and the businesses they seek to guide toward compliance.