Japan’s FSA to Introduce “Holding Order” to Prevent Domestic Crypto Outflows in Case of Exchange Failure

Highlights:

• FSA plans to introduce a “holding order” to prevent domestic assets from leaving Japan.
• The development was triggered by the aftermath of FTX’s massive failure.
• Japan’s financial watchdog aims to protect investors through a crypto regulatory review.

Japan’s Financial Services Agency (FSA) is working on legislation to prevent domestic assets from flowing out of the country if overseas crypto exchanges face issues like those seen with FTX. A report from local media Nikkei states that the FSA plans to introduce a “holding order” in the existing Payment Services Act. 

FSA’s Holding Order to Extend Regulations and Protect Japanese Crypto Investors

Currently, strict regulations apply only to firms registered under the Financial Instruments and Exchange Act. However, if the proposed legal change passes, they will reportedly extend to all “virtual currency exchange companies registered under the Payment Services Act.”

The FSA’s holding order would prohibit crypto exchanges from transferring Japanese residents’ assets to foreign entities. This measure safeguards investors from losing funds in the case of overseas exchanges’ bankruptcy.

The report noted:

“The Financial Services Agency is moving towards creating a new ‘holding order’ in the Payment Services Act, which regulates cryptocurrency exchanges, that will order them not to take domestic assets entrusted to them by customers overseas.”

This is especially curious because the reinforcement of regulations is happening now, despite Japan’s existing protective measures. Currently, 29 exchanges are registered in Japan, both domestic and international. When FTX collapsed, Bankman-Fried’s fraudulent firm was registered as a financial instruments firm, allowing a holding order to be issued. However, the amendment would establish a system to retain domestic assets in Japan, regardless of the exchange’s headquarters.

Japan Prepares for Comprehensive Crypto Regulatory Review

A Bloomberg report revealed that Japan is preparing for a thorough review of crypto regulations, potentially reshaping its digital asset landscape. The review could result in lower taxes on crypto gains and major changes in how cryptocurrencies are regulated in Japan.

Japan’s financial watchdog said it will continue the review through the winter to evaluate investor protection under the current act. Market analyst at Bit Bank Inc. Yuya Hasegawa mentioned that stricter laws could lead to “dramatic changes” in Japan’s crypto market.

In addition to the FSA’s review, Japan has already taken steps to support its crypto and blockchain ecosystem. For example, the government has allowed local investment ventures to invest in cryptocurrencies.

Approval of Crypto ETFs Could Offer Significant Tax Benefits in Japan

Crypto ETFs offer substantial tax benefits. In Japan, crypto investors face a high tax rate of up to 55% on general crypto investments, which are classified as miscellaneous income. In an interview with the Financial Times, Oki Shiozawa, investment director at Sumitomo Mitsui Trust Asset Management, noted Japan’s Ministry of Finance is skeptical about cryptocurrencies.

He stated:

“I can’t think of any way to successfully persuade those authorities at the moment. “I am not saying that crypto-related ETFs are impossible. However, Japan’s Financial Services Agency, which approves financial products, is basically conservative.”

Allowing crypto ETFs would reduce taxes to around 20% under capital gains. Moreover, this change would attract more investors and offer benefits like loss carryforward. On Oct. 20, the leader of Japan’s Democratic Party for the People, Yuichiro Tamaki, urged voters to support his party if they believe “crypto assets should be taxed separately at 20%.”

Japan’s Still Dragging Its Feet on Crypto ETFs – When’s the Moonshot?

Japan’s regulators are still playing it safe while the US and Hong Kong race ahead with spot crypto ETFs.

With tax hits of up to 55% on crypto gains, versus 20% for ETFs, you’d think the FSA would wake up.… pic.twitter.com/7YX3J1MBRR

— Mario Nawfal’s Roundtable (@RoundtableSpace) October 23, 2024