Depth | Legal and regulatory allowance, why hasn't Japan succeeded in an ICO?

Source: 01 Blockchain

Japan is one of the few countries in the world that provides legal protection for digital assets. On May 25, 2016, the Cabinet of Japan signed an amendment to the "Funding Settlement Algorithm" to include digital currency in the legal regulatory system and recognize Bitcoin as a legitimate payment method. The bill came into effect on April 1, 2017, and is of great significance in global digital asset supervision.

At the same time, Japan is also formulating a regulatory mechanism and legal system for blockchain and digital currencies. The Financial Services Agency of Japan is responsible for the supervision of the Japanese digital currency market and stipulates that digital currency exchanges need to apply for a license to operate in compliance. In September 2019, the Digital Currency Exchange Industry Association affiliated with the Japan Financial Services Agency issued the "New Currency Offering Related Rules" and the supporting "Guidelines on New Currency Offering Related Rules", which further strengthened the regulation of digital currency.

However, since the rules were promulgated, Japan has not successfully issued an ICO. On the one hand, the new regulations were issued shortly; on the other hand, they are also related to Japan's regulatory rules and legal system.

On March 2nd, Zero One Finance, Zero One Think Tank, and Digital Asset Research Institute jointly held a closed-door seminar on the topic of "Japanese Blockchain Policy Frontiers" to discuss the development and challenges of Japanese blockchain and digital currency supervision. problem.

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Professor Deng Jianpeng, a professor and doctoral tutor of the Law School of Central University of Finance and Economics, Yang Jinyan, assistant chairman of the board of directors and doctor of law of Huobi Group, CEO of Japan's digital currency consulting company HASHPORT, Yoshida World Expo, and compliance officer Yang Yang of Huobi Japan Co., Ltd. shared in closed sessions. With the relevant situation and views, Bai Liang, founder of Zero One Finance and executive deputy dean of the Digital Asset Research Institute, presided over the event and made a final speech.

After the keynote speeches of the four guests, the participants and guests had a lively discussion on issues such as Japan's regulations on exchanges, Japan's STO regulation and practice, and Japan's blockchain to empower the physical industry.

At the end of the meeting, Bai Liang stated that from the perspective of Japanese practice and on-site exchange of information, the integration and connection between the traditional capital market regulatory concept and the exploration of new digital assets and digital capital markets still faces many problems. It is difficult to abide by the operating rules of traditional capital markets and allow the development and innovation of new assets, while taking into account the protection of investment consumers, but it is also critical to promote the healthy development of new markets . Many of these issues deserve our continued attention, discussion, and research.

Yang Yang: Japanese digital currency supervision tends to be transparent and compliant

Yang Yang introduced that Japan's supervision of blockchain and digital currency has become stricter in recent years. In addition to the Fund Settlement Algorithm implemented in 2017, the Cryptocurrency Exchange Industry Association affiliated with the Japan Financial Services Agency issued in September 2019 the "New Currency Offering Related Rules" and the supporting "Guidelines on New Currency Offering Related Rules" Guidelines, which allow for the public issuance and sale of tokens for financing (IEO and ICO).

Japan's digital currency issuance and financing is classified according to the issuer: if the issuer is a licensed exchange, it is an ICO; if the project party issues through a licensed exchange, it is considered an IEO. Digital currency issuance in Japan is subject to supervision by the Japan Digital Currency Exchange and the Japan Financial Services Agency. In order to obtain compliant currency issuance financing in Japan, a licensed exchange needs to submit many materials to the Digital Currency Trading Association and the Financial Services Agency to elaborate or prove the business model, entity reliability, sales method, publicity method, and digital currency security of digital currency And the reasonableness of prices, and require regular disclosure of information to users, including the actual sales of digital currency, the total amount of issuance, the actual use of financing, and other important changes. As for the financing object, the opinion of the Japan Financial Services Agency is that it is best to focus on Japanese nationals, and going to the sea will involve the confirmation of other countries' regulatory rules such as anti-money laundering. Therefore, the Finance Agency does not recommend financing for overseas users, but it is not explicitly prohibited.

So far, Japan has not made strict regulations on the location of digital currency financing entities, the nature of companies, etc., nor does it require that they must be issued through a blockchain network. However, the management of financing assets is very strict. If it is fiat currency, either open a separate account in the bank in the name of financing assets, or leave it to a third-party trust company for management. If it is a digital currency such as Bitcoin, it needs to be separated from other digital assets and managed by a cold wallet .

Yang Yang introduced that due to the previous theft of exchanges, Japan's related regulations on digital currencies are very strict. Digital currency issuance and trading processes need to be conducted under supervision, and the overall trend is transparency and compliance.

Yoshida World Expo: Japan has high ICO / IEO threshold

The Yoshida World Expo mainly introduced the current situation of the Japanese digital currency trading market and the problems encountered during the actual operation. The Yoshida World Expo stated that Japan is one of the few countries in the world that specifically sets up compliance licenses for digital currency exchanges, and Japan's digital currency market is also a special presence worldwide. The overall transaction size and number of participants in the Japanese market may be second only to China and the United States, but spot transactions account for only 18% of the Japanese digital currency market, and the remaining 82% are leveraged transactions, and most are BTC leveraged transactions. This also led to the Japanese digital currency exchange's trading model mainly based on BTC leveraged transactions, so the issue of new currency financing, whether it is ICO or IEO, the short-term impact on the Japanese market may be limited .

In addition, due to the special nature of the market, the business model of the Japanese digital currency exchange is also somewhat different from other countries. The major business models of mainstream international exchanges include fees for listing and transaction fees. However, there are all two revenue models for Japanese transactions: one is the model of a trading house, and the other is to obtain income through leveraged transactions. Although the Japanese exchange model is different from other countries in the world, the Yoshida World Expo also pointed out that many of Japan's current digital currency exchanges are not particularly profitable.

The Yoshida World Expo expounded the regulatory standards of the Japan Digital Currency Exchange Association and the Japan Financial Services Agency, as well as some pain points encountered during practical operations. In terms of digital currency audits, Japan is very concerned about the issue of price rationality. The exchange or issuer needs to justify the retail price of the tokens it sells in a reasonable way . However, there is no particularly clear solution for how to prove the rationality. Basically, the accounting firm issues a formal report to calculate the price of the new currency. This is also the problem of higher thresholds encountered in the current practice.

In addition to the issue of evaluating the reasonableness of the price, Yoshida World Expo believes that communication issues with accounting firms and the Tokyo Stock Exchange, the requirement to sell tokens within a specified time, and the issue of liquidity in the secondary market are all in the digital currency issuance in Japan Problems that are difficult to resolve in the short term.

Deng Jianpeng: Laws and regulations that value consumer protection are worth learning

Deng Jianpeng pointed out that Japan issued a payment service law in May 2016, requiring exchanges to hold licenses to operate, and formulated detailed regulatory rules for the entire Japanese digital currency market, which is different from China's regulatory policy on digital currencies.

Regarding the industry rules issued by the Japan Digital Assets Trading Association in September 2019, Deng Jianpeng believes that there are no clear penalties and basically flexible requirements, which is worthy of attention. Without strict sanctions or penalties, such seemingly sound rules and regulations may end up empty talk. Because if the law does not have a penalty clause, it is equivalent to having no teeth, and a law without teeth may not have any meaning.

In addition, the Japanese Exchange issues underwriting SGD as a third party. If you do not sell SGD to domestic residents at all, you do not need to obtain a digital currency trading license. Deng Jianpeng believes that if the spillover of digital currency-related risks does not occur in the domestic market, the regulatory rules may be loosened, but if the risks may occur in the local market, the rules will be more stringent. However, the digital currency market naturally has global characteristics, and it is easy to pay to any country in the world through peer-to-peer payment after issuance. Therefore, it does not matter whether it is meaningful to use such rules for supervision.

At the same time, Deng Jianpeng also affirmed the significance of the new rules on consumer protection. Stimulated by some extreme risk events in recent years, Chinese regulators have attached great importance to the rectification of Internet finance, with the focus on achieving financial security. In contrast, the protection of consumer rights has not been given sufficient attention. In this regard, the Japanese series of regulatory rules and self-regulatory regulations deserve our attention. As far as the digital currency market is concerned, the consumer rights of many digital currency markets in China are at their own risk, and many disputes cannot be properly resolved. Therefore, the protection of consumer rights and interests by the new Japanese regulations is worth learning from other countries and regions .

Yang Jinyan: The policy is innovative and the process is more stringent

Yang Jinyan shared his understanding of Japanese digital asset supervision and new regulations from five aspects.

First, compared with the SEC's token safe harbor proposal in Japan and the United States, they have a lot in common. For example, both of the digital asset market regulatory frameworks strive to maintain a balance between encouraging innovation and protecting investors; they both chose to include token issuance into the regulatory framework of similar securities, and follow the same regulatory system as the securities law; Respond to the regulatory needs of the digital currency market.

Second, the difference is that the regulations of the Japan Cryptocurrency Exchange Industry Association on token issuance do not require projects that issue digital asset financing to be blockchain projects, nor do they make requirements on the nature and maturity of the issuing company. While formulating detailed and stringent regulatory regulations, I didn't pay much attention to the definition of the attributes of token securities, and even allowed repurchase and destruction to be defined as securities in the US securities laws.

Third, Japanese regulation has given digital asset exchanges more functions. The new Japanese rules extend the functions of digital asset exchanges to issue and sell tokens, and give more censorship obligations, extending the role of digital asset exchanges from a secondary market role to investment banking roles. This investment bank role is a very important role in the token issuance process. A licensed exchange plays the role of an investment bank, which is not only conducive to reducing industry issues such as irrational valuations or overly hasty projects in the issuance of new coins, but also to the industry Supervision.

Fourth, Japan's regulatory policy attaches importance to the multiple attributes of tokens . Japan clearly refers to the act of raising tokens as fundraising, which means that tokens are of a nature of funds. But it also takes into account the multiple attributes of the token. For example, in terms of taxation, the tokens in the sales process are identified as a commodity, and the funds raised are not subject to taxation. This is similar to Liechtenstein's approach to tokens. Liechtenstein recognizes tokens as containers for assets and also recognizes that the attributes of tokens are diverse, so that they can be properly regulated.

Fifth, the deficiencies of Japan's digital currency supervision: detailed rules, but too harsh in practice; the lack of listing rights on the exchanges makes project financing and trading difficult, which will hinder the development of innovative projects to a certain extent. This is also the reason why no project has been successfully issued since the new regulations were introduced for several months.

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