web3 White Paper 2024 Summary: Entering an era where new technologies become social infrastructure

1. Nippon Nexus: Weaving the web3 Era

1.1 Making our country the center of web3

• Since the release of the “NFT White Paper” two years ago, Japan has collaborated with various stakeholders, including businesses, government, and government agencies, to identify challenges and implement policies to establish itself as a leader in the web3 space.
• As a result, Japan is cultivating a world-leading web3 business environment that prioritizes safety and security while fostering innovation.

Improving the business environment

• Excluding company-owned crypto assets from tax valuation at market value at the end of the period
• Amending laws such as the Fund Settlement Act to enable circulation of permissionless stablecoins (electronic payment methods)
• Amending ordinances to facilitate the utilization of DAOs (Decentralized Autonomous Organizations)

Improving the investment environment

• The 2024 tax reform outline includes a policy to exclude crypto assets held long-term by third parties from tax valuation at market value at the end of the period
• The Limited Partnership Act for Investment (LPS Act) will be amended to allow investment limited partnerships (LPS) to acquire and hold crypto assets

1.2 The global web3 landscape

• The movement towards mass adoption of web3 is accelerating worldwide; the market capitalization of dollar-denominated stablecoins has exceeded 10 trillion yen, and the construction of cross-border networks utilizing DAO is progressing
• A similar surge is evident in Japan; several companies have expressed their intention to enter the permissionless stablecoin market following legal revisions; the utilization of DAOs has advanced in areas such as regional revitalization

1.3 Towards an era when new technologies become the foundation of society

• The world where cyberspace and physical space are highly integrated, which our country has proposed as ‘Society 5.0,’ is becoming a reality
• In that world, in addition to technologies such as AI, IoT, and the metaverse, blockchain is also one of the important technologies

1.4 The positioning of this paper

• This paper is a proposal to not only incorporate the web3 ecosystem into the development of our country, but also to strongly drive forward the development of blockchain technology that could become the foundation of society
• Regarding 1) issues that should be addressed immediately toward promoting web3, and 2) issues that discussions should be initiated and deepened while looking ahead to the further development of web3, this paper presents challenges and policy measures; additionally, 3) it follows up on the progress of proposals that have been announced previously

2. Issues that should be addressed immediately toward promoting web3

2.1 Promoting cross-sectional studies with other fields such as AI, with an eye towards realizing “Society 5.0”

• Problem statement: in order to realize “Society 5.0”, where cyberspace and physical space are highly integrated, collaboration with other fields such as AI, IoT, and the metaverse is indispensable, but cross-disciplinary examination is insufficient
• Recommendation: to realize “Society 5.0”, first, examination should be initiated in a cross-ministerial manner to organize the values created in areas where multiple themes such as web3, the metaverse, and AI are linked and collaborative, as well as to identify new challenges

2.2 International rule formulation

• Problem statement: the cryptocurrency industry is entering a winter period, and a trend towards tightening regulations is emerging in various countries; the G20 and the Financial Stability Board have also agreed on a regulatory and supervisory framework; discussions are underway on implementing international recommendations
• Recommendation: Japan’s regulatory system has proven resilient to cases of failure; based on the leadership demonstrated at the 2023 G7, Japan should continue to play a leading role in responsible innovation that is technology-neutral in implementing international recommendations and the like

2.3 Promoting utilization of VC and DID, examination of DIW

• Problem statement: to advance further digitalization of society and utilization of data, while reducing privacy risks, it is necessary to promote the utilization of promising technologies that contribute to the digitalization of society at large, such as Verifiable Credentials (VC), Digital Identity (DID), and Digital Identity Wallet (DIW)
• Recommendatiaon: in order to use new technologies such as VC, DID, and DIW as a catalyst for business incentives for information sharing mediated by individuals, the Digital Agency needs to take the lead in organizing institutional and technical issues, with a view to the government and local governments becoming Issuers and Verifiers of VCs; additionally, relevant ministries and agencies should work together, with the ministries in charge taking the lead, to implement use cases in public services that are at the forefront

2.4 Diversification of investment vehicles and schemes for blockchain-related businesses

• Problem statement: regarding the acquisition and holding of crypto assets by limited partnership funds for investment (LPS funds), a bill to amend the LPS Act has been submitted; however, it is unclear whether a startup or other crypto asset issuer selling crypto assets to an LPS would be deemed to be engaged in crypto asset exchange services
• Recommendation: with regard to the amendment of the LPS Act, efforts should be made to establish subordinate laws and regulations necessary to make investment in crypto assets by LPS funds practically functional; regarding whether issuers would be considered engaged in crypto asset exchange services, the authorities need to consult with the crypto asset industry and relevant ministries and agencies, and take necessary measures promptly

2.5 Tax reforms (income tax)

• Problem statement: income arising from crypto asset transactions is taxed at the highest rate of 55%, which is a stricter treatment compared to other countries; additionally, when one crypto asset is exchanged for another, income tax is imposed on the gain or loss from the transfer of the crypto asset
• Recommendation: consideration should be given to making the gains and losses from crypto asset transactions subject to separate taxation on filing, allowing losses related to crypto assets to be carried forward and deducted from income amount (for the following 3 years), and also making crypto asset derivative transactions subject to separate taxation on filing; with regard to gains and losses from crypto asset transactions, consideration should be given to not taxing at the time of exchanging one crypto asset for another, but instead taxing them collectively at the point when the crypto assets held are exchanged into legal tender

2.6 Tax reforms (donations)

• Problem statement: donations made in crypto assets are hindered due to the lack of clarity on whether they qualify as tax-deductible specified donations, as well as the absence of an exception to make the deemed income from unrealized gains non-taxable
• Recommendation: if a donation is made in crypto assets, it should be clarified that it may be eligible for tax-deductible donations (specified donations); when an individual makes a donation in crypto assets, similar to Article 40 of the Tax Special Measures Law, measures should be taken to make such crypto asset donations non-taxable

2.7 Securing opportunities for audits

• Problem statement: while there are cases of audits being conducted for web3 businesses, the establishment of accounting and auditing systems for web3 companies is still lagging behind, and there are complaints about not being able to receive audits
• Recommendation: the Accounting Standards Board of Japan should expedite the development of accounting standards and the formulation of guidelines; in order to secure opportunities for accounting audits, efforts should be made to support the initiatives of the Japanese Institute of Certified Public Accountants and others so that the guidelines separately established by the institute and the industry can permeate business practices

2.8 Further measures to promote the utilization of DAOs

• Problem statement: In order to establish and operate a DAO in the form of a limited liability company, it is necessary to address practical issues (such as limitations on non-operating members soliciting members, etc.)
• Recommendataion: practical issues in establishing and operating a DAO in the form of a limited liability company should be identified, and prompt action should be taken to address issues that can be resolved through further clarification of interpretations or review of practical operations
• Problem statement: there are unclear points regarding how to apply existing legal forms other than limited liability companies (NPOs, general incorporated associations, unincorporated associations, etc.) to DAOs
• Recommendation: practical issues in applying existing legal forms other than limited liability companies to DAOs should be identified, and prompt action should be taken to address issues that can be resolved through clarification of interpretations or review of practical operations
• Problem statment: it is necessary to ensure interoperability with DAO legal systems (Switzerland, Marshall Islands, etc.) and practices related to DAOs abroad
• Recommendation: based on surveys and research on foreign legal systems and globally active DAOs, concrete examinations should be initiated; additionally, the possibility of tax incentives for DAO business activities and donations to DAOs should be considered

2.9 Digitalization of payment and investment methods (stablecoins)

• Problem statement: measures to promote the circulation of permissionless stablecoins
• Recommendation: authorities and the industry should collaborate to facilitate the early issuance, circulation, and establishment of self-regulatory organizations for permissionless stablecoins; the feasibility of using government bonds as assets backing yen-denominated stablecoins should be explored; discussions should be initiated to address obstacles related to the issuance of such stablecoins by banks themselves

2.10 Digitalization of payment and investment methods (security tokens)

• Problem statement: developing a regulatory framework conducive to the promotion of security tokens
• Recommendation: with the emergence of both authorized and registered PTS (Proprietary Trading Systems), tailored rules are needed for each type; the suitability of including publicly offered specified beneficiary security investment trusts as security tokens in the NISA (Nippon Individual Savings Account) program should be investigated through industry hearings; the tax treatment of profit distribution and transfer income related to tokenized products based on anonymous partnership agreements should be examined

2.11 Financial institutions entering web3

• Problem statement: when a bank or insurance company attempts to enter the web3 field, it is unclear whether it falls under the category of ancillary business under the law, or the extent to which explanations are required to the authorities regarding company approval examinations such as sophistication
• Recommendation: regulatory authorities should provide support to banks and insurance companies seeking to enter the web3 space through pre-consultation and expedited approval processes; to enhance transparency, authorities should continuously clarify interpretative guidelines and make timely announcements based on accumulated cases

2.12 NFT business

• Problem statement: promoting the use of NFTs in the content industry
• Recommendation: collaboration between the public and private sectors is necessary to develop guidelines that outline legitimate business models for NFT-based random sales and fantasy sports services; issues related to the use of various tokens, including NFTs aimed at granting rights related to content production such as movies, should be identified and addressed
• Problem statement: distribution of profits from secondary market
• Recommendation: regarding the return of profits to artists, it is necessary for related organizations, related ministries and agencies, industry groups, etc. to continue to work together to promptly develop rules such as formulating an appropriate profit distribution model

2.13 web3 business license

• Problem statement: although operating companies have indicated their intention to enter the web3 business, there is a possibility that the customer referrals of users fall under the crypto asset exchange industry, and it is important to provide a UI/UX that is highly convenient for users
• Recommendation: to facilitate the full-fledged entry of businesses into the web3 industry, the creation of a new business category that allows intermediaries between users and crypto asset exchange businesses or electronic payment instrument businesses should be considered

3. Issues that should be discussed and deepened in anticipation of further development of web3

3.1 Support for overseas expansion of web3 content

• Problem statement : in the content industry, there is a lack of awareness of NFT utilization methods and legal risks, and government support is needed for the overseas expansion of content using web3
• Recommendation: to support the overseas expansion of the content industry using web3, relevant authorities should consider providing concrete assistance, such as promoting collaboration with overseas companies, in response to inquiries from interested content holders and creators; the potential for utilizing DAOs should also be promptly explored

3.2 Safe & secure user environment

• Problem statement: for ordinary businesses and consumers, there are still high psychological hurdles to participating in the web3 ecosystem, which emphasizes the principle of self-responsibility
• Recommendation: in order to lower the psychological hurdles for participating in Web3, businesses should provide a safe and secure transaction environment, provide information and awareness to consumers, and crack down on cybercrime; efforts are also needed to prevent wallet development from stagnation

3.3 Local government support

• Problem statement: there are an increasing number of cases in which local governments are collaborating with private businesses on web3 projects, but challenges include improving the know-how of local government employees and developing related systems such as accounting
• Recommendation: local governments will utilize web3 information sharing platforms to share knowledge and consult with the government; relevant ministries and agencies should work closely together to consider measures to resolve local government issues, and support efforts to distribute local high-value-added resources globally

3.4 Crypto asset business

• Problem statement: for the crypto asset leverage ratio, while the upper limit for leverage multipliers for individual customers at 2x may be considered appropriate from the perspective of customer protection, it is also possible that many Japanese individual customer transactions will be leaked to overseas businesses that offer higher leverage ratios; some have pointed out that this actually goes against customer protection
• Recommendation: regarding the appropriateness of the current upper limit on leverage multipliers for crypto asset derivative transactions, we will discuss whether there is a negative impact and its extent, the possibility of eliminating the negative impact by raising the upper limit on leverage multipliers; it is desirable to investigate and consider the degree of transaction risk that would arise from raising the leverage ratio, with the cooperation of the industry and experts
• Problem statement: regarding trends in crypto asset ETFs, in the United States, a Bitcoin spot ETF was approved by the Securities and Exchange Commission on January 10, 2024, and is currently listed on multiple stock exchanges, with Bitcoin ETFs also being listed in Canada and Germany; on the other hand, crypto asset ETFs are not permitted in Japan, but in light of overseas trends, the question is whether it is appropriate financial policy in Japan to not allow ETFs that invest in crypto assets
• Recommendation: in Japan, it is necessary to consider the appropriateness and pros and cons of making crypto assets an investment target for investment trusts (including ETFs) in light of the objectives of the Investment Trusts Act; when doing so, consideration should be given to whether there is a possibility that the assets under management of not only individual investors but also institutional investors will be leaked to countries such as the United States where Bitcoin ETFs already exist; furthermore, if the industry wishes to create and sell crypto asset spot ETFs in Japan, it would be necessary to collaborate with related industries to sort out issues and make investment easier; it is desirable to make recommendations for necessary legal revisions, etc., after considering efforts to foster public understanding as a government

The summary concludes by listing the progress of measures covered in the web3 white paper 2023, and the NFT white paper, which will not be included in this article.

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