Japan’s Shift in Digital Asset Classification

Japan is considering changing its classification of digital assets from payment methods to financial products. This amendment aims to enhance regulatory oversight for issuers, responding to a rise in investment scams as the digital asset market has expanded to about JPY 4.5 trillion (US$30.11 billion).

The Financial Services Agency (FSA) is proposing that the national government review this change by mid-2025, positioning digital assets under the Financial Instruments and Exchange Act, akin to shares in companies. Currently, there are registration requirements for digital asset issuers, but these are less stringent compared to traditional investments.

If enacted, the policy would necessitate greater disclosure of issuers’ identities and corporate statuses. Currently, in Japan, digital assets fall under the Payment Services Act, classifying them more as payment types than investments, similar to loyalty points or gift cards.

This Act labels such payment methods as “virtual currencies,” encompassing any blockchain and non-blockchain digital assets outside the national currency (JPY). For an asset to be classified as a digital payment method, it must exist electronically, be recordable, possess value, and be exchangeable for goods or services.

Since 2017, the definition of “crypto assets” has become more rigorous, particularly for exchange platforms. Additional regulations have been implemented to protect consumers, including prohibiting misleading advertisements and raising customer identification requirements, alongside heightened scrutiny on stablecoin transactions.

Despite some previous claims, the definition of digital/crypto assets does not make them legal tender in Japan; this contrasts with legal frameworks in places like the United States, where they are regarded as property or akin to stocks.

The FSA reported approximately 11.81 crypto asset trading accounts in Japan, nearly 10% of the population. This growth has led to a spike in investment frauds and scams enticing unsuspecting investors with promises of quick riches, some involving real blockchain assets and others purely fictitious.

Scams proliferate in public chat apps, often featuring the term “crypto” in their pitches. While the majority ignore these scams, there remains a concerning number of individuals willing to invest. With a high proportion of Japan’s population over 60, the potential for gullibility persists.

For instance, in 2023, a scheme by a Tokyo-based company named VISION, along with its affiliates, involved selling shares in rental “USB devices” with cash payouts. Once these payments ceased, investors were compensated in a non-listed, practically worthless cryptocoin called “V Cash.” Over 3,000 individuals lost more than $1 million.

Despite enhanced registration requirements, scammers constantly adapt, even bypassing the need for actual digital assets or registered issuers. Nonetheless, stricter regulations may diminish the occurrence of “pump and dump” schemes—where issuers inflate an asset’s price before selling off their holdings, leaving naive investors with worthless tokens.