The concept and legal nature of virtual currencies in Japan
Japan is one of the first countries to legally recognize virtual currencies.
Experts explain the surge in interest in cryptocurrencies in Japan by a number of factors: the existence of legal regulation of cryptocurrency exchanges (by the Financial Services Agency) since 2016, a stable yen (speculators are looking for money on volatile assets), and the convenience of cryptocurrencies in settlements (Japan is a large exporter).
Amendments made to the Law of June 24, 2009, № 54 of 1999 “On payment services” (hereinafter — the Law on payment services), which entered into force on April 1, 2017, the legislator created an even more favorable environment for the use of virtual currencies in the country.
The Law on Payment Services introduced the concept of “virtual currencies”, defined transactions with virtual currencies, and also established requirements for persons carrying out transactions with cryptocurrencies. The new version of the law came into force on April 1, 2017.
According to paragraph 5 of Art. 2 Chapter 1 of the Law on Payment Services, virtual currency means any electronic expression of value from the following:
1) the value (limited to that recorded on an electronic device or any other object using electronic means, and excluding Japanese currency, foreign currencies, and assets denominated in such currencies (the same applies in the next paragraph)) that can be used in relation to an unlimited number of persons for the purpose of paying for the purchase or rent of goods or receiving services, and can also be purchased or sold to an unlimited number of persons acting as counterparties, and which can be transferred using electronic data processing systems;
2) value, which can be mutually exchanged with the value specified in the previous paragraph, with an unlimited number of persons — counterparties and which can be transferred using electronic data processing systems.
Taking into account the requirements of the Law on Payment Services, as noted by Saito So, the first definition includes such virtual currencies as Bitcoin, Ethereum, Litecoin, and other virtual currencies that can be used as a means of payment. In turn, the second clause of the definition includes virtual currencies that cannot be used as a means of payment on their own but can be exchanged for the first type of virtual currency. Tokens that can only be exchanged for the second type of virtual currencies do not fall under the definition of the second type of virtual currencies.
Thus, the Law on Payment Services provided for different uses of virtual currencies, taking into account the nature of the transaction.
It should be recalled that there is a high level of uncertainty about the status of cryptocurrency in the blockchain industry.
In some countries they are recognized as an investment asset or a commodity, in others — as a payment unit, in others, they are outlawed. In some states, different approaches to the legalization of cryptocurrency collide.
Japan has shown an intermediate approach. The Payment Services Act has divided all virtual currencies into two types.
Type 1 is a digitally transferable asset-equated value carrier that can be used to make payments for goods and services and exchange for both other virtual currencies and fiat currencies.
Type 2 are digitally transferable asset-equated value carriers that can be exchanged for other virtual assets.
The division of virtual currencies, depending on their use, creates uncertainty in understanding their legal nature, in connection with which difficulties arise in practice.
In order to eliminate the ambiguity of the concept of “virtual currencies”, the Japan Financial Services Agency (FSA) (hereinafter also referred to as the Agency) has proposed to combine bitcoin and other virtual currencies into a single category called “crypto-assets”.
According to the regulator, this is necessary for a clearer definition of the concept of virtual money and the prevention of misunderstanding among investors when classifying assets and classifying them as legal tender. The report, which refers to the dual interpretation of the term “virtual currency”, was presented by the FSA advisory group. The regulator is expected to revise the relevant laws and regulations in the near future, including the Law on Payment Services, which provides for the use of virtual currencies.
The agency decided to combine the names of bitcoins and other virtual currencies that are traded online as if they were money into a category called “crypto-assets.” The Agency’s advisory group drew up a report indicating that the term “virtual currency” could cause confusion and demanded that the term be changed.
Virtual currencies that are protected against counterfeiting by means of cryptography are commonly referred to in English as cryptocurrencies. However, the finance ministers and central bankers of the Group of 20 largest economies, meeting in March, concluded that such currencies “lack the key attributes of sovereign currencies” and used the term “crypto-assets” to describe them.
Although the law on virtual currency recognized the cryptocurrencies Bitcoin and Ethereum as money having “functions similar to money”, it did not declare them a legalized currency, but only an official means of payment that can “perform the functions of a currency.” According to the law, firms can now use cryptocurrency for mutual settlements with each other. In addition, companies and individuals can buy this virtual money as a commodity.
Thus, the Law on Payment Services in Japan provides for a dual legal nature of virtual currencies, virtual currencies can be a means of payment, i.e. parties can pay for services, goods, etc., as well as an asset that can be used for exchange, sale, etc. It should be noted that the concept of “asset” is more economic than legal, and funds, as a general rule, refer to property, and, accordingly, cryptocurrencies in the second meaning can be recognized as other property.
Legal features of virtual currencies in Japan as a means of payment
In accordance with sections 402.1 and 402.2 of the Japanese Civil Law, foreign currency has established liquidity and is also an unconditional means of payment. Virtual currencies are not foreign currencies and, unlike it, can be accepted for payment only if the persons involved in the transaction have agreed to this payment method.
Some experts, analyzing the legal nature of cryptocurrencies, noting that it is indisputable that money surrogates are a means of payment and their main purpose is to replace the money. However, this can only happen on a full scale in the future.
Within the framework of the current regulation, the virtual currency in Japan can be used for payment as a means of payment, respectively, the national currency of Japan can be indicated in the agreement as to the currency of payment, and the cryptocurrency can be indicated as the currency of payment if the parties agree on this.
The delineation of the currency in the obligation in relation to debt and payment is of great practical importance, primarily for determining the amount of payment currency required to pay off the debt in full.
This issue is not new in the theory of law. Back at the beginning of the XX century. L. Lunts noted that in the monetary obligation “most researchers distinguish the following elements:
1) the monetary unit in which the amount of the obligation is calculated — the so-called currency of debt;
2) banknotes, which are a means of repayment of a monetary obligation, or the so-called currency of payment This distinction is usually made in relation to liabilities in foreign currency“.
This clarification remains relevant for the modern practice of fulfilling a monetary obligation, in which the currency of debt and the currency of payment differ, which is relevant when using virtual currencies as a means of payment.
Taking into account the provisions of the Payment Services Law, it can be concluded that in Japan, regardless of the currency in which the currency of the debt is agreed, the parties can provide that the payment will be made in virtual currency, while virtual currencies do not become legal, since such a condition depends on the agreement of the parties.
Types of Japanese virtual currencies
Well-known virtual currencies are in great demand in Japan, while local cryptocurrencies are also issued in the country.
Japanese cryptocurrencies stand out from other virtual money in that they have the support of the local population. Probably, in no country are domestic coins as popular as in Japan, despite the fact that their price and capitalization are much lower than the main mastodons of this market (bitcoin, ethereum, dash, etc.). Japan is developing its own virtual currency — J-Coin, which is called the brainchild of bankers.
The J-Coin will be used to service online banking transactions based on blockchain technologies.
J-Coin will be very different from other cryptocurrencies. Firstly, it will have an issuing bank (a separate company was created to manage it), and secondly, the value of the new currency will be pegged to the yen.
Risks of using virtual currencies
The legalization of virtual currencies in Japan has provided new opportunities associated with the use of blockchain technologies, at the same time, additional risks have appeared, previously unknown, including those associated with unfair behavior.
Due to the absence of a lender of last resort, a virtual currency investment insurance system, and exchange rate fluctuations, virtual currency investors fully assume the risk of non-fulfillment of contractual obligations by the token/cryptocurrency issuer.
Measures to minimize unfair behavior
on the virtual currency market in Japan
It should be noted that measures to minimize unfair behavior in the virtual currency market in Japan are caused not only by the above risks but also by the complex nature of transactions with virtual currencies resulting from a combination of new financial schemes and high digital technologies, as well as systemic risks.
Let us outline the main measures applied in Japan to protect the rights of users of financial services when making transactions with virtual currencies.
Firstly, Japan has established the Virtual Currency Exchange Association (JVCEA) (hereinafter also referred to as the Exchange Association), which is the only self-regulatory organization in Japan approved by the Financial Services Agency. The association controls all virtual currency exchange transactions in the country.
According to Art. 4 of the Articles of Association, the Association shall ensure the proper implementation of the virtual currency exchange industry and promote its reasonable development and protection of the interests of users of the virtual currency exchange industry.
As part of the tasks assigned to JCVEA, the following consumer protection measures have been proposed:
- using only 4x leverage for margin trading;
- setting a limit on the number of digital assets managed online in hot wallets owned by exchanges;
- stopping advertising, promoting, or encouraging speculative trading in crypto-exchanges in the country.
Secondly, the Law on Payment Services provides for increased control over the activities of traders on the exchange of virtual currencies.
A virtual currency exchange trader must provide the consumer with information:
- that the purchased virtual currency is not Japanese currency or foreign currency;
- on the commission collected from the consumer;
- on the content of the agreement on the exchange of virtual currency;
- that there is a risk of loss due to fluctuations in the value of the processed virtual currency, this fact, and its reasons;
- addresses/contacts of business offices that respond to complaints/consultations of users;
- the term of the contract, the procedure for terminating the contract (including the method of calculating remuneration, compensation, or expenses);
- other matters that are considered useful for the content of the contract.
In addition, the virtual currency exchange trader must ensure consumer protection in virtual currency exchange and the proper and reliable operation of virtual currency exchange transactions.
When trading or exchanging virtual currencies, it is important to provide accurate information so that users do not make false decisions.
According to the Guidelines for Virtual Currency Exchange Organizations, everything related to the above issues must be provided to the user in advance with an explanation/information in writing or in another “appropriate way” so that the user can understand it properly.
Thirdly, the use of new digital technologies is initially introduced in the testing mode, given that such technologies have a developed and complex information system and there is a risk of unauthorized access to information about customers and their funds.