Comprehensive interpretation of the latest ICO legalization program in Japan
Summary:“Japan’s ICO legalization has moved forward, token has entered the financial system, and also include trust fund bankruptcy isolation function. This financial seminar may become a milestone in the history of cryptocurrency development.”
【Published by Yu Qin (玉琴) | CHAINDD】
2018 October 3, Japan’s Financial Services Agency(FSA) held the 6th “Virtual Currency Dealer Seminar”. This financial seminar will become a milestone in the history of cryptocurrency development.
The path of Legalizing ICO: Japan’s FSA recognize token financing function.
According to Japan’s FSA statement: “with the development of financial deriative and ICO brought by tokens, it not only has the function of transtation settlement, but also has diversified functions such as investment and financing.” Japan has officially proposed the financing function of token, which means ICO are on the way to be legalized.
Financial constraints will also be divided by the functions of a token, including transactions, investment, or a currency in ICO.
“There are many types of tokens issued in ICO, for example: such as a negotiable securities/valuable which can be an exchange of tokens that accept the right to distribute benefits, or exchanges for the right to participate in activities. Coins, tokens that are not redeemed for any rights but are still in circulation.”
What we need to discuss are:
- Does a token have the function of finance (such as fiat money)?
- If it does, should financial regulations be introduced into the token system in the future?
- After importing financial regulations, at least 2 important issues should be considered. The first one will be the degree of protection of the user. Second, how will we ensure the “normal” operation of the business?
There are three token related issues discussed by FSA: provision law for payment settlement method or a wildcatter; second, token as the original assets, reference indicators, legal provisions in financial derivatives transactions; third, financing, investment and other ICO related legal provisions.
In the 6th seminar, only one of them been solved. The 2nd and 3rd issues continue to be discussed at the next seminar.
Token related regulations in the trading industry
As we mentioned in previous article, the official statute code of cryptocurrency is the “Fund settlement amendment bill” which signed by Japan’s cabinet on May in 2016. The law will take effect on April 1, 2017.
There are some main issues that the industry needs to worry about: problematic high-anonymity currency transaction including customer asset security, exchange failures, and the risk of speculative trading.
It is more difficult for “altcoin” that has been identified as problematic
FSA has delegated the exchange currency to the self-regulatory organization(SRO). According to the FSA, Japan Virtual Currency Exchange Association(JVCEA) has become an important audit reference for the currency security. The association has regulations on “altcoin”, including the problematic currency are prohibited by the members of the association. The member exchange currency needs to apply to the association. If the association has objection, the transaction will be prohibited. The association will need a summary specification from the recognized currency.
Dealing with the situation of being hack and bankruptcy
In the terms of customer asset security, there are some items need to be aware. For example: There must be restrictions on the trading volume. Not only regulations, the isolation of cold wallets, hot wallets which compensation method need to be involved.
While dealing with the bankruptcy situation of the exchange, it is also necessary to pay attention to the details of the case that the FSA learned from the bankruptcy of the exchange Mt.Gox due to hacking (known as the The Mt.Gox Hack). If the Mt.Gox exchange continues to remain insolvent, bondholders will receive cash compensation far below BTC’s current market conditions. In June 2018, Tokyo District Court of Japan announced that the Mt.Gox Exchange had to withdrawn from the bankruptcy liquidation procedure and instead imposed civil compensation on the creditors.
What needs to be pointed out here is that the FSA gives the cryptocurrency the same function as trust fund to prevent bankruptcy-remote.
The bankruptcy segregation function of cryptocurrency should put on the agenda
According to the FSA, in the classification management of the property hosted by the customer, it is required to clearly separate the property and the customer's property. It can be divided into the following categories:
(1) Property protected by the trust
(2) Property management and the user property accepted by the entrusted party.
Property should be managed in a way that can be immediately identified.
However, the “Funding Decision Algorithm” and the “Trust Law” does not give a clear positioning to the cryptocurrency, which the current method is mainly based on (2), and assists in the management and inspection of financial statements by means of recognized accountants and supervisors.
But the FSA has indicated that it does not deny the trust function of the cryptocurrency, if the judicial definition is more explicit, it should be taken as part of its management method. According to the Financial Commodity Exchange Law, the trading company of financial commodities applies (2) management method when accepting the securities deposited by the customer, and the (2) management method is also applied when accepting the customer’s consumption registration and performing money management.
However, there are several problems involved in the implementation of the bankruptcy remote function by trust.
In the context of the unclear definition of the private law of virtual currency, the trust can effectively play its role. In the circumstances of indetermination, will the imposition of fiduciary duty impose problems?
Each trader must fulfill its obligations while accepting and managing all types of cryptocurrency even if its performance will hinder the smooth trading of the cryptocurrency market.
As the customer property managed by the traders continues to increase, so far there are many trust banks and trust companies that have not actually accepted the cryptocurrency trust. Can they improve their management style and refering to the experienced operators in finance and security?
If the cryptocurrency trust process can be effectively implemented in the actual situation, FSA will encourage traders to accept cryptocurrency trusts as much as possible. If it doesn’t, FSA should implement relevant countermeasures so that customer can be more easily select the operator.
In addition, regardless of the method of the trust, in the absence of a valid bankruptcy segregation mechanism, the right of the customer to receive compensation in the event of the bankruptcy is the priority that must be focused on.
According to the relevant provisions of the Japanese Financial Instruments Act, when accepting customer entrustment and managing cryptocurrency, if the act of buying and selling cryptocurrency is performed, it can be classified into the field of trading; but if there is no cryptocurrency in management, it will not be in the trading field. Japan’s FSA emphasizes that the regulations for “wallet management” related startups will be strengthened.
Cryptocurrency will be indirectly guided to the Japanese Financial and Commercial Law. It is not unrelated to the fact that the cryptocurrency indicated by the head of FISCO after the last Zaif incident should be included in the financial system.
Inhibition the risks of speculation
In terms of speculative trading, it starts from preventing customers from erroneously assessing risks and operators from promoting speculation. The specific actions are to limit the operator’s exaggerated advertising and false publicity. Mainly for the regulation of the exchange’s advertising behavior, in addition to prohibiting exaggeration of propaganda, false advertising.
Ensure transaction is “clearly” public
According to Japan’s FSA, there are differences between general financial products such as virtual currency and stock securities, and it is impossible to estimate the original value of the price. Unlike the transparent price of stocks, there are still many shortcomings in the current stage of cryptocurrency. Therefore, it is necessary to disclose the information of the exchange, especially for the international overseas exchanges such as Binance and Huobi.
Encrypted Assets Law Consolidates Financial Asset Attributes
In another document issued by the Japan’s FSA on September 26 was repeatedly emphasized cryptocurrency as encrypted asset, and this seminar once again focuses on the asset attributes of the cryptocurrency.
On September 28th, FSA held a meeting for strengthen the relationship between relevant participants of the crypto assets in Tokyo.
Empowering of the FSA
In this symposium, there is another detail that caught attention of the researcher stationed in Japan. In the case of the “Zaif incident”, the charter of the autonomy of JVCEA was attached.
In August, after submitting the association identification document and the more than 100-page self-governing treaty charter to the FSA. On September 12, at the 5th Digital Currency Dealer Seminar, JVCEA President Taizen Okuyama sought the rights of the association, actively expanded the functions of the association and the exchange, and explored the possibility of ICO realization. In this seminar, the FSA attached the corresponding strategy of the association to the first law and regulation in the current digital currency trading industry. The status of this digital currency dealer association has made a qualitative leap.
Not only that, the Financial Services Department published a document that it is expected to achieve the association of the Association’s autonomy, and to increase the rate which traders join the Accreditation Association. The FSA pointed out that “virtual currency and technological innovation are changing, so it is very important to combine the management of the law with the autonomous charter of the Association.” At the same time, the FSA stipulates that even if they do not join the Financial Agency Certification Association, major practitioners and exchanges must abide by the association’s charter. Otherwise, the FSA has the right to reject the exchange license application.
Researchers in Japan believe that while the FSA decentralizes, it will also give the exchanges that currently have great freedom of development. For example, the ICO policy formulation and implementation is likely base on exchange, and other virtual currency derivatives business development will soon be put on the agenda.
■ Source & Reference: FSA(Financial Service Agency) , CHAINDD
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