Why Japan Should Be Watched Closely in the Web3 Space

Jun 24, 2024

As one of the world's leading technological powerhouses, Japan has long been at the forefront of innovation. With its highly skilled workforce, advanced infrastructure, and deep cultural appreciation for emerging technologies, the island nation is poised to play a pivotal role in shaping the web3 landscape. This article explores the key factors that position Japan as a force to be reckoned with in the world of decentralized technologies, from its progressive regulatory approach to its tech-savvy populace and initial market adoption.

1. Japan's Regulatory Environment

Clear Legal Status of Cryptocurrencies

In April 2017, Japan became one of the first countries to provide a comprehensive legal framework for cryptocurrencies through revisions to the Payment Services Act. The revised Act formally defined cryptocurrencies as a form of legal property and payment method. The Financial Services Agency (FSA) was tasked with overseeing cryptocurrency exchanges, requiring them to comply with stringent registration requirements, robust security standards, anti-money laundering (AML) measures, and know-your-customer (KYC) processes. This regulatory clarity addressed longstanding ambiguities and fostered trust and confidence in Japan's cryptocurrency market.

Strict Yet Necessary Regulations

Japan's approach to cryptocurrency regulation is widely regarded as strict yet necessary to establish a healthy and secure trading environment. Key requirements include:

  • Mandatory registration for cryptocurrency exchanges, with minimum capital and positive net asset value thresholds to ensure operational viability.

  • Robust cybersecurity measures, including the mandatory use of cold wallets or reliable custody services for storing customer assets.

  • Exchanges must maintain liquid assets equal to the value of customer holdings in hot wallets, ensuring sufficient funds for withdrawals (No fractional reserve model). 

  • Comprehensive AML and KYC procedures to prevent money laundering and terrorist financing activities.

  • Segregation of customer assets from exchange's proprietary assets to protect user funds.

While stringent, these regulations aim to protect investors, prevent illicit activities, and maintain market integrity. As of April 2023, Japan had 35 registered cryptocurrency exchanges serving over 7 million account holders, reflecting a thriving yet well-regulated market.

Regulation of IEOs

Japan also provides a regulated environment for Initial Exchange Offerings (IEOs), where cryptocurrency exchanges facilitate token sales on behalf of issuers. The FSA requires exchanges conducting IEOs to adhere to strict guidelines to ensure transparency and protect investors. These guidelines include:

  • Detailed disclosure requirements for the issuer's business plan, financial status, and project risks.

  • Thorough due diligence by the exchange to verify the legitimacy and viability of the project.

  • Clear terms and conditions for token issuance and investor participation.

  • Measures to prevent market manipulation and fraudulent activities.

By regulating IEOs, Japan aims to create a secure and transparent fundraising environment, encouraging legitimate projects and protecting investors from potential risks.

Recent Regulatory Updates

In June 2023, Japan implemented a new regulatory framework for stablecoins. The amendment classified stablecoins into two categories: "digital money-like" and "crypto asset-like."

"Digital money-like" stablecoins, pegged to legal tenders like the Japanese yen, are now regulated as "electronic payment instruments" under the Payment Services Act. This classification aims to facilitate the use of stablecoins for corporate transactions and remittances while ensuring proper oversight by authorities.

On the other hand, algorithmic stablecoins not pegged to legal tenders are classified as "crypto asset-like" and regulated under existing cryptocurrency laws.

Furthermore, the 2023 amendment introduced stricter advertising regulations, prohibiting excessive or misleading promotional practices that could promote speculation in the volatile cryptocurrency market, further safeguarding investor interests.

Recent Opinions on Regulation

Japan's proactive regulatory approach has garnered praise from industry leaders like billionaire Mark Cuban. In a recent post on X, Cuban suggested that the U.S. Securities and Exchange Commission (SEC) head Gary Gensler should take a page out of Japan's cryptocurrency playbook.

Cuban commended Japan's ability to learn from past incidents like the collapse of Mt. Gox, the once-prominent cryptocurrency exchange, and the Coincheck hack. He noted that Japan efficiently adapted its regulations to better protect investors in the aftermath of these events.

"They make it impossible to comply with registration rules," Cuban stated, criticizing the SEC's perceived hostility toward the cryptocurrency industry. He accused the SEC of effectively trying to destroy the crypto sector, making it challenging for legitimate companies to operate within the current regulatory framework.

Emi Yoshikawa, the VP of Strategy & Operations at Ripple, praised Japan's regulatory response, stating, "After several major exchange hacks in Japan, the regulator tightened compliance requirements to protect investors, which somewhat handicapped Japanese exchanges in the last bull cycle, but it was a sensible move for the longer term."

This proactive stance ensured that users of FTX Japan were protected from the turmoil that followed the collapse of the main FTX exchange in 2022, highlighting the effectiveness of Japan's regulatory safeguards.

2. Proactive Government Initiatives

Establishment of the Digital Agency

In 2021, the Japanese government launched the Digital Agency, a dedicated body to spearhead the country's digital transformation agenda, including the promotion of Web3 adoption.

Ministry of Economy, Trade, and Industry (METI) Initiatives

METI has been at the forefront of Japan's Web3 initiatives, publishing numerous strategies, reports, and policy recommendations. Key initiatives include:

Blockchain Governance Initiative Network (2020): Exploring blockchain use cases across various industries.

Web3 Ecosystem Map (2021): Providing an overview of Web3 technologies and their potential impact.

Web3 Project (2022): Collaborating with leading tech firms to develop Web3 standards and promote adoption.

Web3.0 Policy Promotion Conference

In May 2022, METI established the Web3.0 Policy Promotion Conference to support Web3-related companies and nurture the token economy in Japan. Key initiatives include:

・Developing a regulatory sandbox for Web3 applications.

・Providing financial support and incentives for Web3 startups.

・Collaborating with educational institutions to foster Web3 talent and skill development.

・Exploring the use of NFTs and DAOs.

Liberal Democratic Party (LDP) Initiatives

In January 2022, the LDP Digital Society Promotion Headquarters set up the "Web3 Project Team" (formerly the NFT Policy Review Project Team). In March 2022, the team issued the "NFT White Paper," positioning Web3 as a "new frontier of the digital economy" and recommending the development of the NFT economy as a national strategy. This led to the LDP's "Digital Nippon 2022" proposal, highlighting tax challenges causing talent outflow from Japan. Following these recommendations, the Japanese government included Web3 in its growth strategy in June 2022, committing to developing the necessary environment for NFT and DAO utilization.

Prime Minister Kishida's Support

Since taking office in 2021, Prime Minister Kishida has promoted "new capitalism" focusing on "virtuous cycles of growth and distribution" and post-pandemic societal reconstruction. In May 2022, he announced plans to create a conducive environment for blockchain, NFTs, and the metaverse in a speech in London's financial district. In November 2022, the "Startup Development Five-Year Plan" further emphasized the importance of blockchain technology and Web3, including tax reforms. In the latter half of 2022, the Financial Services Agency (FSA) and METI began earnest efforts to improve the Web3 business environment, leading to a partial revision of corporate tax rules for cryptocurrencies in fiscal 2023.

Integration with Japan's Unique Strengths

The Web3 field is highly compatible with Japan's "Cool Japan" strategy and regional revitalization policies, aimed at boosting the nation's overall vitality. Japan's rich and high-quality intellectual property (IP) in anime, games, and other fields has significant economic potential. Utilizing NFTs and fan tokens issued by artists and organizations can provide additional revenue streams for IP holders and creators, maintaining loyal fans and promoting cultural and economic growth. Additionally, local startups are leveraging Web3 technologies, NFTs, and DAOs to address regional challenges and enhance vitality. Prime Minister Kishida highlighted the potential of the metaverse to enable activities and interactions beyond geographical constraints, promoting local livability and new human exchanges.

Through these proactive measures, Japan aims to position itself as a global leader in Web3 innovation, attracting talent, investment, and driving the adoption of these transformative technologies across industries.

Support for Web3 Enterprises

The Japanese government has implemented initiatives to promote and support web3 businesses, recognizing the importance of fostering a robust token economy. These efforts include providing financial assistance, regulatory guidance, and creating an environment conducive to innovation and growth.

Japanese Enterprises' Engagement with Web3

Several prominent Japanese enterprises have actively engaged in the Web3 space, showcasing practical applications and driving the ecosystem forward.

  1. Sony:

    • NFT and Blockchain Initiatives: Sony has been exploring blockchain technology and non-fungible tokens (NFTs) in various domains, including gaming and entertainment. The company aims to leverage these technologies to enhance user experiences and create new revenue streams.

    • Partnerships and Collaborations: Sony has partnered with blockchain firms to develop new applications and standards, contributing to the broader Web3 ecosystem.

  2. Toyota:

    • Blockchain for Supply Chain: Toyota has implemented blockchain technology to improve transparency and efficiency in its supply chain operations. By using blockchain, Toyota can ensure the authenticity and traceability of parts and components, enhancing overall supply chain management.

    • Decentralized Mobility Services: Toyota is exploring decentralized mobility services that leverage blockchain to offer more secure and efficient transportation solutions.

  3. Mitsubishi UFJ Financial Group (MUFG):

    • Digital Currency and Blockchain Initiatives: MUFG has been at the forefront of digital currency development in Japan. The financial group is working on creating a stablecoin pegged to the Japanese yen, aiming to facilitate seamless digital transactions.

    • Blockchain for Financial Services: MUFG is exploring blockchain applications in various financial services, including cross-border payments and trade finance, to improve efficiency and reduce costs.

  4. Rakuten:

    • Rakuten Wallet: Rakuten, a leading e-commerce giant, has launched Rakuten Wallet, a cryptocurrency exchange platform. This initiative allows users to trade cryptocurrencies and integrates blockchain technology into Rakuten's ecosystem.

    • NFT Marketplace: Rakuten is also developing an NFT marketplace, leveraging its extensive user base and digital infrastructure to promote the adoption of NFTs in Japan.

Opportunity for Platforms like NERO

With many Japanese companies still hesitant to fully embrace web3, platforms like NERO have an opportunity to bridge the gap between the traditional web2 landscape and the emerging web3 ecosystem. As Mark Cuban pointed out, Japan's regulatory approach is commendable, and initiatives like NERO could play a crucial role in facilitating the transition for Japanese entities.

Highly Tech-Savvy Population with Untapped Potential

Demographic and Economic Factors

Japan boasts a highly tech-savvy population, with an internet penetration rate of over 93% and a GDP per capita of over $38,000 as of 2022. Japanese consumers have been quick to adopt new technologies, with widespread use of mobile payments, e-commerce, and other digital services.

Current Blockchain Awareness and Usage

While awareness of blockchain technology is relatively high among Japanese consumers, actual usage remains limited. According to a survey conducted by the Japan Blockchain Association in 2022, approximately 70% of respondents were aware of blockchain, but only 14% had used it.

Potential for Web3 Adoption

The combination of Japan's tech-savvy populace, high disposable income, and early exposure to emerging technologies creates a fertile ground for web3 adoption. By effectively educating and engaging this market segment, web3 projects and platforms have an opportunity to tap into a sizable and receptive user base.

Conclusion

Japan's progressive regulatory environment, government support, tech-savvy population, and initial market adoption position the country as a key player in the web3 space. However, challenges remain, including the need for further education, talent development, and continued regulatory refinement to facilitate widespread adoption.

Platforms like NERO, with their global team and mission to bridge the gap between web2 and web3, could play a crucial role in accelerating Japan's transition into the decentralized future as Japan looks to take on a bigger presence on the global stage. As the web3 landscape continues to evolve, Japan's influence in shaping its trajectory cannot be overlooked, making it a market worth watching closely in the years to come.







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