The following analysis presents the views of Maksym Sakharov, Co-founder and CEO of WeFi
Recently, Japan’s regulatory body for financial services suggested a significant change in how cryptocurrencies are categorized, potentially leading to a uniform 20% tax rate on income derived from digital assets. This proposal could also pave the way for the introduction of crypto exchange-traded funds (ETFs) within the country.
For a considerable period, Japan’s existing tax system has subjected cryptocurrency earnings to taxes as high as 55%, which is widely considered a deterrent to crypto investment.
Entrenched Conservatism
However, the high tax isn’t the only, or even the biggest, hurdle to Bitcoin ETF approval in Japan. Late last year, Prime Minister Shigeru Ishiba appeared skeptical about crypto ETFs, questioning whether the government should actively promote digital assets in the same way as conventional investments, according to a statement he made on X (formerly Twitter) seemingly dismissed.
His governing coalition recently lost ground in the upper house, falling just short of retaining their majority. Despite this shifting political landscape, and Ishiba’s commitment to remaining in power, Japan’s inherent cautiousness remains a consistent factor.
Ishiba’s hesitation regarding ETF approval reflects a deeper, more systemic issue. The regulatory caution in Japan isn’t solely about protecting consumers; it stems from a deeply ingrained culture of risk aversion that can hamper innovation. This conservative mindset, perhaps even more than the much-discussed 55% crypto tax, is what’s holding back progress.
Ironically, Japan was once a pioneer in the crypto space, ahead of nations like South Korea and Hong Kong. The country recognized cryptocurrency as a legitimate payment method back in 2017 and established some of the earliest regulatory frameworks. Furthermore, in the second quarter of 2024, Metaplanet initiated a trend of Japanese listed companies investing in Bitcoin, accumulating a treasury valued at almost $2 billion in BTC at the latest count. Additionally, advancements have been made in stablecoin and crypto payment infrastructure. Sumitomo Mitsui has signed an MoU with Ava Labs and Fireblocks, preparing to launch cryptocurrencies pegged to fiat currencies.
Despite these successes, a complex and challenging bureaucratic environment makes it difficult for new businesses to thrive. Startups aiming to offer virtual asset services face strict requirements, including extensive documentation, a local bank account, a Japan-based compliance team, and a minimum capital of 10 million yen, among other prerequisites.
While these regulations aim to protect users, it’s crucial to find a balance between security and fostering innovation. Currently, it seems the Financial Services Agency (FSA) operates somewhat independently of those actively building in the Web3 space, creating regulations without fully considering the practical technical limitations.
If high taxes were the only real obstacle to Web3 innovation, the FSA’s proposed tax reforms would likely trigger significant growth.
A Plan for Change
To shift from a primarily compliance-focused approach to one that encourages competitiveness, Japan needs to re-evaluate some long-held principles. The government should replace the current pre-approval model with a faster system allowing exchanges to list tokens subject to post-launch audits. This would involve tokens meeting minimum disclosure and security requirements for listing, with full regulatory and technical audits conducted within 30 days. This ensures investor protection through enforceable audit sanctions and delisting powers, while significantly reducing listing times.
Regulators should also establish dynamic “sandboxes” utilizing zero-knowledge proofs for secure verification. Furthermore, there’s a need for government investment. Japan could create a $500 million FSA-matched fund to directly support Web3 startups meeting established security standards, giving the government a stake in their success.
Finally, to improve collaboration and address its isolation, the financial regulator should include tech founders on its advisory boards. This would offer firsthand insights into industry challenges, enabling policy creation that considers the end-user experience rather than prioritizing the preservation of the status quo.
These aren’t unreasonable requests; they are already standard practices in leading global crypto adoption jurisdictions.
The Web3 community is closely observing. With populist parties like Sanseito gaining traction on “Japan First” platforms, the political landscape is evolving. If Ishiba’s coalition loses power, a new government may usher in a more innovation-friendly era. However, this depends on Japan’s regulators moving away from their risk-averse tendencies. Without such a shift, tax reforms will be merely superficial, ETFs will remain uncertain, and Japan’s early advantage in the cryptocurrency sector will fade into obscurity.