Will Japan Legalize Crypto-Assets?

Source: Liu Jiaolian

A few days ago, a friend asked, what does the so-called legalization of crypto assets in Japan mean by some domestic industry media?

I am also puzzled. I remember that Japan has long legalized Bitcoin.

For example, according to Wikipedia and related reports, as early as 2016, Japan revised its Payment Services Law to recognize Bitcoin as legal property. In 2017, the Virtual Currency Law came into effect, recognizing the legal payment status of virtual currencies. In 2017, according to the new consumption tax law, users purchasing Bitcoin or other virtual currencies will no longer be charged an 8% consumption tax. In 2022, a bill was passed to clarify the legal positioning of stablecoins, which is basically equivalent to digital money.

So, in late February 2024, what Bloomberg reported was not the legality of the use and transactions of digital assets, but the legality of investment and financing of digital assets.

In the past, venture capital (also commonly known as VC) could not directly invest in currency issuance projects in Japan. Because VC investments use legal currency, and the financing tool for currency issuance projects is not equity but digital currency. VCs cannot directly hold tokens and cannot use legal currency to exchange tokens in the hands of project parties. Therefore, currency-issuing projects cannot complete token financing from these VCs.

Part of the proposed revision to the Industrial Competitiveness Enhancement Act submitted by the Japanese Kishida government on February 16 is to solve this problem, that is, as the proposal says, "will take Measures to add crypto-assets to the list of assets that may be acquired and held by investment limited partnerships”. This refers to a vehicle used by venture capital firms to secure investment capital, as most venture capital firms exist in the form of limited partnerships (LLPs).

Even in the United States, there are many problems with how to invest in tokens with legal currency, how to hold tokens, and how to handle these assets in terms of accounting and taxation. So much so that for truly serious encryption projects, such as Uniswap, its main body, Uniswap Labs, still adopts the traditional method of exchanging US dollars for shares, that is, equity financing, when financing from VCs such as paradigm, a16z, etc.

This set of bills by the Japanese government will, at best, facilitate the financing of venture capital by crypto startups and web3 startups. It has nothing to do with retail investors investing in crypto assets, nor does it have to do with crypto projects raising funds from the public, that is, ICO-type fund-raising. Therefore, its energy and waves are ultimately limited.

It is also worth mentioning that the proposal put forward by the Japanese government has not yet been finally approved by Congress.