“Japan is back, again“ — LDP web3 white paper

Following its “Interim proposal on web3 policy” from last December, the Liberal Democratic Party (LDP) Digital Society Promotion Headquarters web3 Project Team has published its final version of the paper this week. Under the theme “Towards an era where everyone can utilize digital assets”, it argues that until now, the crypto-asset industry has been driven by “early adopters” who are attracted to new technologies and trends, and because Japan has overcome many hardships in the industry (e.g., Mt Gox, Coincheck hacks), it is well-positioned to convince the world of the future potential of web3.

Therefore, the future of web3 pioneered by Japan, as envisioned by the authors, ensures a mature market where you can work with peace of mind under clear rules. The clarity of rules will be a competitive edge in the market. Only when a legal, safe and secure trading environment is in place will general consumers and large companies be able to participate widely in the web3 ecosystem.

The white paper contains three sections:

• Issues that should be addressed immediately to promote web3
• Issues to start and deepen discussion in anticipation of further development of web3
• Progress of measures taken up in the NFT white paper

Since this article will not go into further detail on last year’s NFT white paper, we will not cover the third section.

Issues that should be addressed immediately to promote web3

International rule making

• Japan’s regulatory system has proven to be highly resilient to bankruptcy events, hence Japan should demonstrate leadership at the G7 in 2023, look ahead to the future potential of web3, and clarify its leading position for technology-neutral and responsible innovation.

Tax reform

• Tokens held by companies should be excluded from the year-end mark-to-market taxation for tokens that are not for short-term trading purposes, and should be evaluated at acquisition cost. There are several options for specific exclusion methods, but they should definitely be realized this year.
• Gains and losses related to crypto-asset transactions will be subject to separate self-assessment taxation, allow carry-over deductions from income for crypto-asset losses (three years from the following year), and separate self-assessment taxation for crypto-asset derivative transactions.
• Gains and losses on crypto-asset transactions should not be taxed when the crypto-assets are exchanged, but should be considered taxable when the crypto-assets held are exchanged for fiat currency.

Securing audit opportunities

• The Accounting Standards Board of Japan should urgently develop accounting standards and formulate guidelines . Related ministries and agencies should also support the JICPA and industry study sessions that started in January this year, and promote initiatives such as information sharing and the formulation of necessary guidelines.

Decentralized Autonomous Organizations (DAOs)

• Based on the limited liability company, a special LLC-type DAO law will be enacted, and the regulations under the Companies Act and the Financial Instruments and Exchange Act will be partially changed and applied. Legislators should also consider enacting legislation as soon as possible.

Examination, issuance and circulation of various tokens

• With the cooperation of the Financial Services Agency, in the examination of tokens that are not subject to the application of the JVCEA system, the examination items should be specified and visualized according to the status of the token.
• It is important to promptly prepare an environment for registration examination. In addition, the industry should establish a self-regulatory organization and enact regulations to enable operations that comply with compliance. In order to promote the issuance and distribution of yen-denominated stablecoins, the industry is encouraged to consider business models.
• In order to smoothly start trading security tokens on PTS (proprietary trading system), the Japan Securities Dealers Association (JSDA) and STO Association should promote efforts such as the formulation of self-regulatory rules. Even for security tokens with low circulation, consideration should be given to transactions that are completed digitally. In the future, it is necessary to consider the treatment of taxation, including tax procedures, for the development of the security token market.

Consumer protection

• The Ministry of Economy, Trade and Industry (METI) should continue to promote and encourage experimentation with overseas platforms and industry groups’ attempts to record content rights information.

Entry of financial institutions into web3

• As an authority, we will provide support for efficient application preparation through preliminary consultations, and expedite the approval review process. In addition, from the perspective of improving transparency, the authorities should continue to formulate guidelines for interpretation and publish them in a timely manner in accordance with the accumulation of future cases.

NFT business

• Public-private partnerships should promote the formulation of guidelines that indicate legal business models for fantasy sports services using NFTs.
• The government should support the formation of an industry group that covers web3 across the content industry, and work together to formulate guidelines and conduct studies necessary for the domestic implementation of highly profitable overseas business models.
• It is desirable to make an effort to recognize the problems in using various tokens including NFTs for the purpose of granting various rights and interests related to content production such as movies, and to consider how to deal with them.
• The public and private sectors should work together to formulate guidelines on legal return methods for providing data to the fantasy sports and sports betting markets using NFTs.
• The public and private sectors should work together to sort out the rights of data and NFTs, and then consider ways for content holders to legally license NFTs and return profits.
• The public and private sectors should work together to establish rules for returning profits to athletes. In this respect, industry practices differ for each sports organization, so it would be beneficial to promote the development of a profit return model. Consideration should also be given to sorting out the relationship with performers’ publicity rights when the one-chance principle is applied to film copyrights.

Diversification of investment vehicles and schemes

• In order to further diversify investment vehicles and schemes, the Ministry of Economy, Trade and Industry (METI) and the Financial Services Agency (FSA) conduct a fact-finding survey of fund procurement using crypto-assets and governance tokens, etc. LPs should be able to invest in startups that issue crypto assets and tokens.

Issues to start and deepen discussion in anticipation of further development of web3

Private law treatment of digital assets

• Following international trends, we will first sort out the issues that are causing legal uncertainty regarding digital asset transactions under private law.

Support for overseas expansion of web3 content

• In order to support the overseas expansion of the content industry using web3, the ministry and agency that will serve as a contact point should be clarified and a consultation contact point should be established. Matching with reliable companies and utilization of overseas tax incentives should also be considered.

web3 business license

• The financial authorities should consider points of focus for determining the applicability of businesses using crypto-assets, and promote awareness of the FinTech Support Desk. Furthermore, if necessary, consideration should be given to creating a more flexible structure of regulations, including the creation of new industries.

Safe and secure usage environment

• In order to lower the psychological hurdles when participating in Web3, business operators should provide a safe and secure transaction environment, provide information and enlightenment activities for consumers, and strengthen crackdowns on cybercrime. Efforts to prevent development stagnation are also necessary.

Unhosted wallets

• Amidst the challenge of balancing the use of unhosted wallets with the demands of AML/CFT regulations, necessary research and research will be conducted on everything from the possibility of its use to the issues that accompany it, including the impact it will have on a wide range of fields in the public and private sectors.

Local government support

• It is necessary to strengthen cooperation between local governments and related ministries and agencies. Local governments will utilize the web3 information sharing platform to share knowledge and consult with the government. Relevant ministries and agencies should work closely together to collect information on local government issues and consider measures to resolve them.

AML/CTF

• Deepen discussions to understand and analyze AML/CTF risks associated with crypto-assets, including considering the use of frameworks such as expert meetings, and contribute to the development of a sound crypto-asset economic zone and the progress of AML/CTF prevention measures.

Investment DAO

• It is necessary to clarify the regulations to be applied according to the type of investment DAO and its operational status, and to consider the development and operation of the system necessary for the utilization of investment DAO.

Metaverse

• Along with examining the formulation of guidelines for employment support using the Metaverse, the public and private sectors should start discussing support for job creation, technology development, and overseas expansion.

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