regulation

The Second Meeting of the Financial System Council's Working Group on Crypto Assets

Norbert Gehrke

07 Sep 2025 — 8 min read

The second meeting of the Financial System Council's Working Group on Crypto Assets, held on September 2, 2025, highlights a significant push in Japan towards strengthening crypto asset regulation, primarily by considering a shift from the Payment Services Act (PSA) to the Financial Instruments and Exchange Act (FIEA).

This move is driven by the increasing investment-oriented nature of crypto assets, the need for enhanced investor protection, and a desire to foster market reliability and innovation.

Concurrently, the US is also advancing its regulatory framework, with key legislation like the "Digital Asset Market Structure Bill (CLARITY Bill)" aimed at clarifying supervisory authorities (SEC vs. CFTC) and establishing comprehensive regulatory frameworks for digital commodities and stablecoins.

Challenges remain in effectively classifying crypto assets (especially distinguishing between "funding/business activity type" and "non-funding/non-business activity type"), implementing robust information disclosure, and managing the unique risks associated with the asset class, such as price volatility and cyber-attacks.

1. Japan's Regulatory Shift: From Payment Services Act to Financial Instruments and Exchange Act (FIEA)

Japan is actively discussing moving the primary legal framework for crypto assets from the Payment Services Act to the Financial Instruments and Exchange Act (FIEA) to enhance investor protection and market integrity, aligning with the investment-focused evolution of crypto assets.

Rationale for Shifting to FIEA

Investment-Oriented Nature: Crypto assets are increasingly viewed as investment products, with over 12 million accounts in Japan and over 5 trillion JPY in user deposits. Surveys show over 70% of holders are middle-income, and 86% expect long-term gains. The Financial Services Agency (FSA) states, "The investment-oriented nature of crypto assets is progressing, and the pressing issues surrounding crypto asset investment are highly compatible with problems traditionally addressed by the FIEA."
Enhanced Investor Protection: The FIEA offers a more robust framework for investor protection, covering issues like information asymmetry, unregistered operators, insider trading, and market manipulation.
Addressing Current Issues: Current problems include unclear whitepapers, discrepancies between descriptions and actual code, lack of issuer disclosure obligations under current self-regulation, and prevalent fraudulent solicitations. The FSA notes, "The majority [of consultations] concern fraudulent solicitations for crypto asset investments or transactions."
Global Alignment: International bodies like IOSCO are recommending stronger measures against fraud and market abuse, including insider trading, and some European countries have already enacted relevant legislation.
Preventing Fraud and Exploitation: The Japan Blockchain Association (JBA) emphasizes the importance of "preventing fraudulent and evasive acts by issuers and exchange operators for investor protection."

Key Regulatory Enhancements under FIEA

Information Disclosure: Strengthened information disclosure for "funding/business activity type" crypto assets, requiring issuers to provide detailed information on project use of funds, related parties, and risks. For "non-funding/non-business activity type" assets, exchange operators would have disclosure obligations.
Operator Regulation (Type I Financial Instruments Business): Crypto asset exchange businesses would largely be subject to regulations equivalent to Type I Financial Instruments Business, covering areas like advertising, suitability principles, and customer asset segregation. The FSA suggests, "It would be appropriate to impose regulations equivalent to Type I Financial Instruments Business on crypto assets."
Market Operation Regulation: While current crypto asset "exchanges" might not require the strict licensing of traditional financial instrument exchanges due to their limited price discovery function across global markets, appropriate transaction management and system development are still necessary.
Enforcement: The FIEA provides stronger enforcement mechanisms, including criminal penalties (up to 5 years imprisonment or 5 million JPY fine) for unregistered financial instrument businesses, compared to the PSA (up to 3 years imprisonment or 3 million JPY fine for unregistered crypto asset exchange businesses). It also allows for emergency injunctions against unregistered operators.

Token Classification and Challenges

The FSA proposes two categories:

Type ① (Funding/Business Activity Type): Issued for fundraising, with funds used for projects, events, or community activities. Requires high transparency due to information asymmetry.
Type ② (Other Crypto Assets): Includes Bitcoin, Ethereum, and meme coins. No specific issuer can be identified, making direct disclosure obligations on the issuer difficult. Exchange operators would bear information provision duties.
Boundary Definition: The JBA stresses, "It is important to clearly define the boundary between Type ① and Type ② to prevent circumvention."
"Issuer" Definition: Key to this classification is determining the "issuer" based on "centralized authority" (e.g., ability to generate crypto assets or modify programs at their discretion).
Dynamic Nature: It is noted that "due to ongoing decentralization, crypto assets may transition from Type ① to Type ②."
Exclusions: NFTs and stablecoins are currently considered outside the scope of this regulatory review, with the FSA stating that for stablecoins, "it is unlikely to be traded as an investment object at this time."

Self-Regulation by JVCEA

The Japan Virtual and Crypto assets Exchange Association (JVCEA) already has self-regulatory rules for "customer suitability checks" and "transaction/holding limits."
These rules require members to establish "transaction initiation standards" based on factors like transaction content, user attributes, crypto asset characteristics, investment experience, and deposited assets.
Members must also set "transaction limits or holding limits" to prevent users from experiencing financial hardship due to losses.
JVCEA conducts audits to ensure compliance and provides guidance. It notes that "over 80% of individual crypto asset investors invest less than 100,000 yen, and over 90% transact less than 500,000 yen."

2. Global Token Fundraising and Payment Trends

Global token fundraising is shifting from centralized launchpads to decentralized finance (DeFi) methods like Dutch auctions and Liquidity Bootstrapping Pools (LBPs), while crypto payments, though growing, predominantly use fiat-backed models.

Global Token Fundraising Trends

Shift from Centralized to Decentralized: Centralized exchanges like Binance are moving focus from "Launchpad (primary sales)" to "Alpha (secondary market)" and "Megadrop (airdrop-style distribution)."
DeFi Dominance: Fundraising in DeFi is becoming mainstream, utilizing methods such as "Dutch auctions (price decreases to find demand) and LBP (Liquidity Bootstrapping Pool, sales pools where price decreases over time)."
Disadvantages of Centralized Launchpads: Fixed price sales lead to price volatility, limited investor participation (lottery system), and high risk for issuers due to single listing timing. Stricter screening is also observed.
Japanese Regulatory Divergence: Japan's Initial Exchange Offerings (IEOs) typically use the "QTM method (fixed price determination based on the quantity theory of money)". Methods that adjust price or quantity based on demand, like direct listings or Dutch auctions, are difficult in Japan due to concerns about market manipulation regulations.
Fundraising Examples: Notable IEOs in Japan (2021-2024) include Palette Token (PLT), FCR Ryukyu Coin (FCR), Financie Token (FNCT), Nippon Idol Token (NIDT), Elf Token (ELF), Brilliantcrypto Token (BRIL), and NOT A HOTEL COIN (NAC), raising millions to billions of JPY.

Crypto Asset Payment Status

Limited Growth in Japan: While crypto asset trading accounts and token types have increased, the use of crypto assets as a payment method in physical stores and online shops by JVCEA members has not seen a uniform increase. The number of businesses accepting crypto payments has remained relatively stable (e.g., 225 businesses in 2023-2024).
Corporate Payments: "Currently, no services offered by members for corporations involve inter-company payment settlements using crypto assets." This is attributed to corporate tax laws, which apply mark-to-market valuation, making it less attractive for companies to hold crypto assets for settlement purposes.

Payment Types

Crypto Asset Receipt Type: Merchants directly receive crypto assets (e.g., BTC, ETH). Pros: direct on-chain ownership. Cons: price volatility, accounting complexities.
Fiat Currency Receipt Type (Predominant): Users pay with crypto, payment processor converts to fiat at market price, and merchants receive fiat. Pros: no price volatility for merchants. Cons: reliance on intermediaries, fees.
Stablecoin Receipt Type: Users pay with crypto, merchants receive fiat-pegged stablecoins. Pros: no price volatility, on-chain holding. Cons: varying regulations/taxation across jurisdictions.
Domestic Examples (Mercari): Mercari introduced Bitcoin payments, reporting "approximately 1.2 million transactions" by "approximately 630,000 users" (20% of account holders) from February 2024 to August 2025. This uses a fiat currency receipt model where Bitcoin is sold at market price and converted to fiat for payment.
Overseas Examples: Major retailers (Starbucks, Burger King, Microsoft, Gucci, Tesla for DOGE), travel sites (Trivago), and gift card platforms (UseBitcoin) accept crypto payments. Fiat-receipt models are dominant, but stablecoin receipt (e.g., PundiX, Slash Payment) is also growing. Globally, there are "34,000 crypto asset payments/month" with "10,000 Bitcoin payments/month." Debit/prepaid cards linked to crypto accounts (Coinbase Card, Kraken, Binance, Bitget, Transak) are also prevalent, facilitating fiat-receipt-type spending.

3. US Regulatory Developments (CLARITY Act)

The US Congress passed three crypto-related bills during "Crypto Week," with the "Stablecoin National Innovation and Leadership Act (GENIUS Act)" signed into law. The "Digital Asset Market Structure Bill (CLARITY Act)" aims to clarify SEC and CFTC jurisdiction over digital commodities and establish a comprehensive regulatory framework.

Key Legislation

Digital Asset Market Structure Bill (CLARITY Act): Aims to clarify regulatory authority between the SEC and CFTC over digital commodities and establish a comprehensive framework.
Stablecoin National Innovation and Leadership Act (GENIUS Act): Signed into law by President Trump on July 18.
Anti-CBDC Surveillance State Act (Anti-CBDC Act): Aims to prohibit the Federal Reserve from issuing a central bank digital currency without congressional authorization.

CLARITY Act (Key Provisions - awaiting Senate review)

Jurisdiction Clarification: Defines "digital commodities" (digital assets intrinsically linked to blockchain use, excluding securities, derivatives, stablecoins) and clarifies the supervisory powers of the SEC and CFTC.
"Mature Blockchain" Definition: A blockchain system "not controlled by any individual or group under common governance." Maturity (decentralization) is determined by transparency (open source code), governance (no single entity with >20% voting power), and dispersed ownership (issuer/related parties hold <20% of total supply).
SEC Jurisdiction:Exemption from securities offering disclosure regulations for investment contracts related to digital commodities on "mature" or "intended-to-be-mature" blockchains, provided certain conditions are met (e.g., sales under $50 million/year, no single purchaser holds >10% of outstanding supply, reporting/disclosure obligations on maturity).
CFTC Jurisdiction:Mandatory registration for "digital commodity exchanges" (most centralized crypto trading platforms) and "digital commodity broker-dealers" with the CFTC.
Core principles for exchanges include customer asset segregation, prohibition of proprietary trading, transaction monitoring, record keeping, and minimization of conflicts of interest.
Exchanges can only trade digital commodities on "mature" or "intended-to-be-mature" blockchains.
DeFi Exemption: Decentralized Finance (DeFi) activities are exempt from registration and compliance requirements, but SEC/CFTC anti-fraud and anti-market manipulation powers still apply.
AML Requirements: Exchanges and broker-dealers are subject to Bank Secrecy Act AML requirements.

4. Japan Blockchain Association (JBA) Recommendations for Regulatory Review

The JBA supports the shift of crypto asset regulation to the FIEA, advocating for universal rules to ensure fair competition, promote innovation, and enhance investor protection by mandating information disclosure for token fundraising.

Overall Stance: JBA "agrees to review the primary applicable law for crypto assets to the Financial Instruments and Exchange Act."
Core Principles:Universal Rules: "All issuers, exchange operators, and users should be subject to common rules." This prevents unfair competition and fosters healthy innovation.
Investor Protection: Crucial to prevent "fraudulent and evasive acts" by project entities (e.g., opaque use of funds, arbitrary changes to token supply, related party transactions).
Market Development: Aims to "improve the reliability of the crypto asset market" and enhance global competitiveness, potentially through "ETF consideration" and "relaxation of individual leverage ratio regulations (from 2x to 5-10x)."

Token Classification (JBA Proposal for Type ①)

Focus on "De Facto Control": JBA proposes that Type ① (funding/business activity type) should include tokens where "specific persons with substantial decision-making power for generation, etc., raise funds by selling tokens."
Indicators of Control: This includes holding 51% or more of voting rights (for token generation) or "de facto control through off-chain means (e.g., board decisions, contracts)."
Scope of "Specific Persons": Includes the issuer (company, foundation), group companies, related parties, founders, employees, and project stakeholders.
"Sale" Definition: Covers both primary issuance (e.g., IEOs) and secondary market sales (e.g., from treasury or escrowed tokens), if conducted for fundraising by the issuer/related parties.
Information Disclosure Requirements (JBA Proposal):Basic Information (for all tokens): Whitepaper, technical specifications, consensus algorithms, code repositories, supply details (max, current, schedule, escrow), protocol change authority, and main operating entities.
Additional Information (for potential Type ① or "known/knowable" cases): Detailed issuer information (shareholders, financials), related party information (transactions with LPs, incentive programs), use of funds, and token holdings by issuer/related parties (including lock-up status and employee token lists).
Confirmation by JVCEA: JBA suggests JVCEA should "rule-ize" these review items and "conduct confirmation within possible limits," especially for Type ① tokens.