Japan: Amended Crypto Regulations to Come Into Effect on May 1

Japan’s amended crypto regulations will come into effect from May 1, 2020, after a one-month delay with the updated provisions focusing on custody and proper classification of cryptocurrency assets.

Japanese Crypto Regulations Focusing on Custody

According to a government press release, Japan’s amended Payment Services Act (PSA) and Financial Instruments Exchange Act (FIEA) will be passed into law on May 1, 2020. The updates to both laws concern the nature of crypto regulations in the country going forward.

Japan’s parliament had passed both legislations in 2019 with the laws expected to come into effect at the start of April. The amended PSA focuses on the custody requirements for crypto exchanges in Japan.

According to the new laws, crypto trading platforms must segregate customer deposits from their cash flow. Thus, Japanese cryptocurrency exchange platforms will from May 1 need to employ the services of a recognized crypto custodian.

Exchanges with hot wallets must hold an equal amount of stored funds in safe locations to be used as compensation in the event of a hack. Back in 2018, Tokyo-based Coincheck suffered one of the worst cryptocurrency exchange hacks, losing over $500 million worth of NEM tokens.

Indeed, Japan’s move towards strengthening its crypto regulatory climate is a direct consequence of numerous high-profile cryptocurrency exchange hacks. The country’s Financial Services Agency (FSA) has consistently taken exchanges to task over poor security measures.

The soon-to-be-passed PSA also touched on the nature of crypto classification in Japan. Before the coming of the new law, regulators in Japan classified cryptos as “virtual currency” but from May 1, tokens like Bitcoin (BTC), Ether (ETH) and the rest will be known as “crypto-assets.”

Towards a Robust Cryptocurrency Industry in Japan

While the PSA focused on definition and custody requirements, the FIEA dwelled on the initial coin offering (ICO) and security token offering (STO) markets. Based on the new FIEA, ICOs and STOs now constitute electronically recorded transferrable rights and must follow laid-down guidelines similar to those already existing for mainstream financial instruments.

Japan’s crypto derivatives market will also be regulated under the FIEA signaling the first attempt by Japanese regulators to police the country’s cryptocurrency derivatives market.

The FSA and FIEA are part of a raft of new guidelines for Japan’s crypto market with the FSA’s crypto margin trading peg seeing leverage limits capped at between 2-4x of customer deposits.