Japan's Financial Services Agency policy relaxation opens up new prospects for Web3 innovation

On October 8, 2024, the Japanese Financial Services Agency issued an important statement, clarifying that "non-custodial wallet services" using authentication technology are not considered to be crypto asset exchange industries. The impact of this policy goes far beyond the interpretation of legal provisions, but marks an important step for the Japanese government in promoting digital innovation and global competition. So, what does this statement mean? What is its impact on Japan's Web3 and blockchain industries? Aiying believes that we will take you to interpret the connotation of this policy and explore its possible impact on the future of the industry.

The deep meaning behind the Financial Services Agency's statement: legal clarification and innovation encouragement

Non-custodial wallets, as the name suggests, are digital wallets where users manage their own private keys and do not rely on centralized third parties. Representatives of this type of wallet include the well-known "MetaMask" and "Phantom", which provide users with the ability to independently control digital assets and become a key component of the decentralized finance (DeFi) ecosystem. However, since its operation does not rely on centralized exchanges, there has been controversy over whether non-custodial wallets are legally defined as crypto asset transactions. The Financial Services Agency of Japan reached this conclusion through the "gray area elimination system", clarifying that the services of non-custodial wallets do not belong to the crypto asset trading business. This system aims to eliminate uncertainty by finding clarity between emerging businesses and existing regulations, thereby reducing compliance barriers and encouraging more innovative companies to move in. The confirmation process was promoted by the general corporate entity "Japan Contents Blockchain Initiative" and its Pass Wallet project. Pass Wallet is not a direct non-custodial wallet, but a service provider that provides non-custodial wallet certification infrastructure. The release of this statement provides strong support for the legitimacy of its services and business expansion for the entire industry.

Reducing the compliance burden and opening up a new situation for non-custodial wallets

The most direct impact of this statement is to lower the compliance threshold for non-custodial wallet providers. Previously, Japan had strict regulation on crypto assets. Companies faced a lot of legal requirements when applying for crypto asset trading licenses, but due to its inherent characteristics, non-custodial wallet services are difficult to fully comply with the regulations of the traditional crypto asset exchange industry. This gray area has deterred many non-custodial wallet providers from entering the Japanese market.

The statement of the Financial Services Agency clarified the legal status of non-custodial wallets, which means that the barriers to compliance for such products have been greatly reduced. For international leading wallets like MetaMask and local emerging decentralized wallet developers, this is undoubtedly an important "relaxation". They can devote more energy and resources to technological innovation and market expansion rather than complex legal review and compliance operations. This also means that more local Japanese developers will have the opportunity to participate in the development of non-custodial wallet services and promote the richness and diversity of the entire ecosystem.

Beneficiaries of Japan's Web3 Ecosystem: Authentication Infrastructure and the Spring of DApps

Pass Wallet, as an authentication infrastructure provider for non-custodial wallets, is one of the important beneficiaries of this statement. Pass Wallet provides authentication-related technical support for non-custodial wallets to improve the security of user identity authentication. This type of infrastructure is key to achieving wallet security and user trust. As compliance uncertainty decreases, infrastructure providers such as Pass Wallet will have more confidence to expand services, especially as users' demand for secure authentication grows.

The clarification of the legal status of non-custodial wallets will also directly promote the further popularization of decentralized applications (DApps) in Japan. Non-custodial wallets are the entry point for users to enter the DeFi world, and the legalization of wallets will undoubtedly attract more users to participate. Take decentralized exchange Uniswap and lending protocol Aave as examples. These protocols are seamlessly integrated with non-custodial wallets, and users can trade and borrow directly through these wallets. After this announcement, such DApps are expected to gain more Japanese users because users no longer need to worry about the legal risks of their operations.

Increased regulatory transparency: enhanced investor confidence and global competitiveness

For the Japanese market, this open attitude will undoubtedly attract more international capital to enter the Japanese market. For example, some internationally renowned venture capital firms, such as a16z Crypto, may therefore have a stronger interest in Japanese Web3 startups, especially in areas such as supporting infrastructure such as wallets and authentication services. The clarity of the policy allows these investors to invest in the market and allocate resources with greater peace of mind, thereby further promoting the development of the industry.

Aiying Aiying believes that from the perspective of international competition, Japan has released a strong signal of support for Web3 innovation through this statement. In contrast, the United States and the European Union are still cautious in the regulation of non-custodial wallets, focusing more on anti-money laundering (AML) and customer due diligence (KYC). By recognizing the compliance status of non-custodial wallets, Japan has provided a more friendly and clear business environment for global Web3 companies, which may lead the trend of non-custodial wallets and related services around the world.