Is Japan’s Progressive Attitude To Web3 Masking Its Strict Crypto Rules?

As the US grapples with the legal status of digital assets under its existing frameworks, many critics point to countries such as Japan as blueprints for sensible regulation. However, certain draconian elements of Japan’s crypto laws mean the nation may not be quite as easy to navigate as its crypto-friendly reputation implies. With deep local expertise and a vision for the development of the crypto payments segment in Japan, projects like Slash are now finding a way through the complexity.

FTX was back in the news again recently, as former users of the collapsed exchange in the US received a promising update from the firm’s bankruptcy estate that they could be compensated in full for their losses.

It may come as a surprise to some of these users that another segment of the FTX customer base has already received full settlement from the firm – those who were based in Japan. As a subsidiary entity operating as part of Japan’s strictly regulated digital asset sector, FTX Japan was subject to rules, such as the requirement to segregate customer funds in fiat and crypto from the exchange’s own assets. This meant that when the firm collapsed, the Japanese entity was able – and required – to compensate customers in full for their losses.

A Bruising Legacy

This high level of consumer protection enabled by a well-developed regulatory approach to digital assets has earned Japan plaudits for being a “crypto-friendly” nation. Indeed, the ruling Liberal Democratic Party has been open about its commitment for Japan to “vigorously promote the development of an internationally competitive web3 business environment as a part of its national strategy.”

However, Japan’s position at the forefront of crypto regulation came after the country was at the epicenter of several of the highest-profile hacks in the industry, including Mt.Gox (2014), Coincheck (2018) and Zaif (2018.) Many of the laws that are still in place emerged from the aftermath of these incidents, and people on the ground are increasingly expressing concern about the restrictive nature of certain rules and the risk they may act as a deterrent to a growing Web3 segment.

One frequently cited example is the high barrier to entry for new crypto-asset firms. To register as a crypto-asset exchange services provider (CAESP) under Japanese law, firms must be a stock corporation in Japan, or if an overseas company, must take steps to establish a local presence and obtain a license. There are also minimum capital requirements and rules regarding corporate organization and governance. As such, only a small handful of firms hold licenses to operate as CAESPs in Japan.

Stablecoins are also strictly regulated since only banks and certain financial institutions can issue them, and only if assets are kept in Japan and invested in the domestic banking system. However, perhaps the biggest barrier to crypto adoption among citizens is Japan’s stinging tax regime applied to digital assets. While tax rates on stocks and equities are capped at 20%, the Japanese National Tax Association class cryptocurrencies as “miscellaneous income,” setting the highest tax rate at an effective 55%.

Breaking Down Barriers to Payments

For long-term holders of crypto who rarely sell their assets, the high tax position isn’t necessarily a big problem. However, for traders or anyone who wants to liquidate their crypto holdings to spend them on goods and services, the tax rates in Japan are prohibitively high. Furthermore, the challenges associated with setting up as a crypto-asset service provider means that many of the larger global crypto payment providers, such as Crypto.com or Gnosis Pay have been unable to find a foothold in the Japanese markets.

Slash was founded with the vision of filling the crypto payments gap in the Japanese market using a strategy that optimizes for the operational freedoms available without falling foul of regulations or compliance requirements. Slash Web3 Payment is a non-custodial crypto payment gateway that utilizes decentralized liquidity and takes advantage of the rapidly expanding ecosystem of Web3 wallets to execute cross-border transactions safely with cryptocurrencies.

Since it only deals with crypto-to-crypto swaps, it doesn’t fall under the strict licensing regimes that govern fiat-related services. This also means that users are spending crypto and not liquidating to fiat; thus, the expenditure avoids the miscellaneous income classification and associated tax.

The project has embarked on an ambitious expansion program since launching on mainnet in 2022 and subsequently securing $1.5 million in seed funding. It has established collaborations with Softbank Payment Service and Zaif to develop smart contract-enabled payment services and integrated Slash Payment into Bybit’s Japanese platform, which will soon be rolled out globally.

Furthermore, over 3,000 merchants have signed up for the service, transacting over $10 million up to February 2024, demonstrating substantial demand for compliant Japanese crypto payment services.

Regulation of digital assets in every jurisdiction seems like an inevitability at this point. However, for lawmakers, the line between sensible regulation and stifling innovation remains wafer-thin and tricky to navigate. In the meantime, it creates conditions ripe for innovation as firms seek to find the sweet spot between compliance and demand for new technologies.