Taxation, ETFs, major groups: a deep dive into the Japanese crypto ecosystem

After being one of the first countries to take an interest in cryptos, Japan has lost ground in recent years, not least because of particularly strict regulation. Backed by the government, several major groups such as Sony and Rakuten want to revive the momentum. Report from the scene.

Taking a trip to Tokyo to discover the crypto ecosystem is a pretty unique experience.

I say "pretty unique" because it's a bit like going back to your roots and not just because the creator of bitcoin - whose true identity we don't know - is called "Satoshi Nakamoto".

Many people have forgotten, but Japan was one of the first countries where bitcoin and especially MtGox, THE first major crypto exchange platform in history, developed.

Between 2010 and 2014, the platform run by Frenchman Mark Karpelès was a key player in the adoption of bitcoin (at the time there were no other cryptos yet) with a position - up to 70% of the global market, which no other player has ever subsequently reached.

While many have forgotten the meteoric growth of MtGox and the madness that gripped Tokyo at the time, everyone remembers its sad end and its consequences.

In 2014, the platform went brutally bankrupt due to a hack - it wasn't the first. In total, around 850,000 bitcoin were stolen (200,000 will be recovered). At their current value, we're talking about almost $40 billion 🤯. By way of comparison, FTX caused losses of $15 billion.

After several years of proceedings, Mark Karpelès, who spent 12 months in prison in Japan (2015-2016), was given a suspended prison sentence in 2019.

At the same time, and to prevent such a scandal from happening again, the Japanese government is passing a whole series of laws to regulate the crypto sector; by the way, this is exactly what has been happening in the United States for the past 18 months and the FTX scandal.

This regulation affects the entire industry:

• Japanese exchange platforms are now regulated.
• a licence must be obtained to carry out cryptocurrency custody.
• issues and listings of tokens and cryptos are subject to approval by the Japanese Financial Services Authority (FSA).

The adoption of this new regulation closes the first page of the crypto industry 🇯🇵 and is decisive for the new one that is being written.

Japan is a small retail market

Is this the MtGox effect? What is certain is that several years after the platform's collapse, Japanese interest in cryptos is not total, even despite the sharp rise in prices (the price of bitcoin has multiplied by more than 200 since 2014) and the development of numerous platforms; the country now has around thirty; they are all regulated, of course.

"The collapse of MtGox has left a significant mark," confirms Justin Dhingra, who is the strategic director of Crypto Garage, a company that notably has an Exchange dedicated to businesses.

But in everyone's opinion, beyond this undeniable psychological effect, it is above all the taxation and regulations introduced from 2019 that are having a real impact.

• First of all, taxation:

Since 2019, cryptocurrency gains have not been taxed along the lines of financial securities (shares), i.e. at a flat rate as in most countries; in France, for example, there is a flat tax of 30% on crypto gains - from €305 of gains over the year.

For a Japanese person, the level of tax on crypto gains depends on his annual income. The higher his income, the higher his level of tax on crypto gains will rise according to a scale ranging from 5% to 45%.

On top of this taxation, a 10% "habitation tax" must be added, which can push the marginal rate up to 55%. Note, however, that the 55% bracket only applies to incomes in excess of €250,000 a year, which still leaves a bit of room for manoeuvre!

In the meantime, the subject of taxation continues to rise in Japan as the number of holders grows (albeit slowly). According to estimates, between 7% and 10% of the Japanese population hold cryptos.

Based on a proposal from the FSA, the government is thus planning a tax reform in 2025 that could see all crypto-related profits taxed at 20%.

"This would clearly give visibility to investors who find it too difficult to know exactly what their tax level will be," explains Fujihara Masamichi, a member of the research team at exchange Bitpoint, which is one of Japan's leading exchange platforms (Top 10).

• Then regulation:

Since 2019, "to protect investors", every cryptocurrency and token must be validated by the Japanese Financial Services Authority (FSA) in order to be listed on a Japanese exchange platform.

The problem is that this procedure can take up to six months, so new tokens take a long time to arrive on platforms such as Bitflyer or Bitpoint which ends up chilling customers.

"If you take three months to list a token, you can be sure that you'll arrive after the battle," Bitpoint's side explains.

In addition to this constraint on the listing of tokens and cryptocurrencies, leveraged products are almost non-existent. They are limited to a multiple of 2, whereas most neighbouring countries allow multiples of 150, as is the case in South Korea. "It's a lot safer, but at what price?" asks a Japanese trader. "There may be a happy medium", he adds.

Result ten years after the fall of MtGox, Japan's biggest Exchange, Bitflyer, is "only" in 50th place worldwide in terms of volume, a long way behind players such as the American Coinbase or South Korea's Upbit.

A market for businesses?

Paradoxically, it is more on the 'more traditional' business side that things are moving forward.

The impetus was given in 2022 by the current Prime Minister, Fumio Kishida (conservative right), who, like other leaders, wants to make his country a leader in the crypto universe.

We thus remember the former French Finance Minister, Bruno Le Maire, who explained in 2022 to BFM Crypto wanting to make France "the base camp for cryptos and decentralised finance".

In any case, the Japanese leader's message has been well received by major Japanese groups. Despite the market downturn in 2023, Japanese companies, which this year benefited from the abolition of taxation on unrealised capital gains on cryptos (a scheme that had been causing the entire sector to howl for years), have invested billions of dollars in the sector.

"There has been a real boost with the launch of projects that are serious," confirms Keisuke Kimura, who looks after international relations at the Japan Cryptoasset Business Association (JCBA), one of the main crypto lobbies in the sector in Japan.

The association has 150 members, including the messaging app Line, gaming giant Konami, and consulting firms KPMG and Deloitte. Interestingly, there are few crypto startups in Japan, similar to South Korea, because much of the innovation comes directly from large corporations and their well-developed intrapreneurship systems.

Sony, Rakuten and other major Japanese financial groups (MUFG, SMBC, Mizuho...) have spearheaded this strategy. After more than a year in development, the PlayStation manufacturer announced a few weeks ago the launch of Soneium, a layer 2 (second-layer protocol).

Developed in partnership with Startale Labs on the Ethereum blockchain, Soneium should enable Sony to explore "new mechanisms for creating and sharing value in the gaming and financial worlds". Circle, the American issuer of the USDC stablecoin (the 2nd largest on the planet), is partnering Sony in the development of Soneium.

Rakuten, meanwhile, which is regarded as "Japan's Amazon", is steadily increasing its number of projects. The Tokyo-based company has an asset tokenisation platform and accepts payments in cryptocurrencies. When questioned, Rakuten declined to comment on the volumes of cryptocurrency payments.

Banks are primarily focused on stablecoins, although regulations in this area are also particularly strict.

Stablecoins: The Banks' Playing Field

While European MiCA regulation requires stablecoin issuers to maintain a cash reserve of 30% to 60% of the stablecoin's capitalization — which many, like Tether, denounce (read our interview) — in Japan, the reserve must be 100% and deposited in a bank with a dedicated license for this purpose.

Furthermore, the issuer of the stablecoin cannot use these funds to generate yield. "This poses a real problem in terms of business model," emphasizes a member of a Tokyo-based fund.

It's mainly due to this "economic" constraint that there are currently no stablecoins available in Japan, with the exception of Sky's DAI (formerly Maker), which is not considered a stablecoin by the regulator, but a cryptocurrency, as it is pegged to cryptocurrencies and not fiat currencies.

To successfully establish themselves, major players in the sector, such as Circle, have signed partnerships with local actors (Circle is working with Coincheck), hoping that things will progress.

Meanwhile, the country's main banks — MUFG, SMBC, Mizuho — are moving forward with a common stablecoin project, without the same profitability constraints.

"For banks, a stablecoin is more a means of keeping customers in their ecosystem than finding new revenue streams," whispers a crypto actor, highlighting the tensions that can exist between the crypto universe and more traditional finance.

The burning issue of ETFs

The topic that perhaps best sums up the Japanese situation is Bitcoin Spot ETFs (backed by real bitcoins, not synthetic products).

Since the launch of Spot ETFs in the US, with record volumes collected by BlackRock and other giants, several of Japan's neighbours have moved their pawns forward.

This is obviously the case for Hong Kong, which has had its own Bitcoin and Ethereum Spot ETFs since the spring - though volumes remain modest ($300 million) compared with those seen in the US (over $30 billion).

The South Korean regulator may also soon validate Bitcoin Spot ETFs.

But in Japan, things are not moving forward because banks and exchange platforms are not pulling in the same direction. While banks and funds are pushing for the launch of Bitcoin Spot ETFs, platforms are rather opposed to such a project because they are afraid of losing even more customers who would no longer go through them.