A new report has found strict regulations in Japan are likely to benefit new players in the long term.

Double jump.tokyo, the game developer behind My Crypto Heroes, introduced So & Sato, a Japan-based law firm specializing in crypto and blockchain, to Cointelegraph Japan.

On March 31, the law firm released a report covering all aspects of digital assets in the Asian nation, from tokenized securities to crypto derivatives.

Entering the crypto market under strict regulations

Joerg Schmidt and So Saito from So & Sato told Cointelegraph Japan in an interview that local regulations for cryptocurrency exchanges are “far stricter” than in most other countries. However, they said this would be beneficial in the long run because it encourages the traditional finance world to get involved:

“The market is highly regulated in Japan. What seems to be a regulatory overkill, at first sight, is likely to help the market to mature in the mid to long term. This will allow more institutional players to enter the market and to increase their stake in the digital asset space.”

Regulations pertaining to crypto in Japan generally fall under the Payment Services Act (PSA) and the Financial Instruments and Exchange Act (FIEA). Amendments passed for both acts tightening existing regulations enter into force in May.

Under the new PSA regulations, crypto exchanges must employ third-party operators to keep hold of their users’ money, separating it from their own cash flow.

Foreign-operated crypto exchanges in Japan

Under local law, cryptocurrency exchanges in Japan must obtain a license through the country’s Financial Services Agency (FSA), while foreign-based exchanges must hold a license both in their home jurisdiction and in Japan. The report details the requirements:

“To register as a crypto asset exchange [in Japan], companies must meet certain criteria. Local companies must be incorporated as a stock company and have a minimum capital of JPY 10 million. An exchange must further ensure that its net assets do not fall below the amount of users’ funds that are stored in a hot wallet.”

As of today, there are 23 exchanges registered with the FSA, although none of them are yet foreign operated. OKCoin, which operates a subsidiary in Japan, was recently granted a license. So explains why the regulations seem to discourage overseas exchanges:

“Some Chinese exchanges have purchased an already-licensed Japanese exchange, so it’s open for foreign exchanges to take over licensed entities in Japan. But under the regulations, if foreign crypto exchanges themselves want to obtain Japanese licenses, they need to have similar licenses in their countries under the current regulations. There are not so many similar exchanges in foreign countries.”

The law firm concluded that the most likely exchanges that could be granted licenses would come from countries such as the United States, where regulations are thorough.

Getting in on the Japanese crypto market early

While local regulations might not be conducive to foreign exchanges at the moment, the law firm alluded that it was not a bad time to enter the crypto market in Japan.

They believe the regulatory measures help make Japan stand out as a safe haven for crypto, rather than the wild west of finance that it’s sometimes known for.