Early Legislation Leads to Maturity? A Glimpse into the Current State of the Cryptocurrency Market in Japan

Recently, on 5/16, the Economic and Financial Affairs Council (EcoFin) of the European Union unanimously passed the MiCA Act, the world's first comprehensive regulatory framework for encrypted assets. This marks a significant milestone, as the regulatory process for cryptocurrencies and assets seems to be advancing steadily despite the current downturn in the crypto market.

In addition to the rapidly developing Hong Kong, Japan, which has long established cryptocurrency regulations, is also widely regarded as one of the hubs for cryptocurrency trading in Asia. However, early regulations do not necessarily indicate a high level of maturity, and Japan's closed and independent nature often makes it difficult to grasp the true state of the local cryptocurrency market.

Current Situation of the Cryptocurrency Market in Japan

According to the report "The Truth of Web3 in the Asia-Pacific Market" compiled by TechFlow, the number of cryptocurrency ecosystem users in Japan has exceeded 5 million.

Characteristics of the Cryptocurrency Market in Japan

• Overly strict regulations leading to lack of vitality (to be relaxed starting April 2023)
• Slow to catch up with trends
• Strong purchasing power

Japan's regulatory framework for the cryptocurrency industry aims to prevent money laundering and protect investor rights. For example, in the FTX incident, the country's regulations require exchanges to segregate user assets from operational funds, with at least 95% of assets stored in cold wallets, in order to successfully process withdrawals for 8,000 users totaling 21.7 billion Japanese yen. Additionally, income related to the cryptocurrency industry is subject to taxation, with a staggering tax rate of up to 55% for substantial amounts, resulting in a relatively subdued and illiquid overall cryptocurrency market activity in Japan.

Also stemming from stringent regulations, it takes up to six months for exchanges to list new tokens due to regulatory approval processes, making it challenging to keep up with global market trends. As a result, Japan often experiences trends that have long passed in global markets.

However, from Cardano's ICO in 2015 to the expansion of various overseas exchanges, Japan's strong purchasing power is evident despite the market's low activity. Japan has accounted for over 90% of Cardano token fundraising, and exchanges like Bybit and Bitget have successfully cultivated a core customer base in Japan, partly thanks to the thriving culture of KOL promotions in the country.

It is worth noting that Japan's ruling party, the Liberal Democratic Party, is set to release the "Japan 2023 Web3 White Paper" in April 2023, which is expected to further relax regulatory measures, with key changes including:

• Lower tax rates: Tokens issued by individual companies will be exempt from taxation, and non-individually issued tokens can be exempt from taxation if not for "short-term trading purposes."
• Faster token review process: Tokens will be reviewed for listing on exchanges by the Financial Services Agency to increase listing efficiency.

(For details on the white paper, please refer to this report.)

Which Countries Allow Legal Cryptocurrency Trading?

As one of the fastest-growing technology markets in the world, Japan legalized cryptocurrencies early on. The government established a framework based on the Payment Services Act (PSA), allowing some cryptocurrencies and exchanges to be used for payment and trading purposes.

According to SAG IPL data, most countries and regions around the world are gradually accepting cryptocurrencies for payment or commercial purposes. Bitcoin is considered a commodity under the jurisdiction of the U.S. Commodity Futures Trading Commission (CFTC), legal and taxable, but the status of other cryptocurrencies remains undecided. In Singapore, local businesses and consumers can freely use cryptocurrencies. Canada has legalized Bitcoin in limited commercial models such as ATMs and exchanges, although some provinces still prohibit using financial cards to purchase cryptocurrencies.

In general, most countries regulate the use of cryptocurrencies for payment and transactions and collect additional taxes from the high liquidity of this emerging market. However, it is essential not to overlook the fact that most countries have not yet formally and clearly regulated any cryptocurrencies, and they still lack sufficient measures to prevent crimes such as fraud and rug pulls, making the risks relatively higher and less secure compared to traditional investment markets.