The Japanese financial newspaper Nikkei reported in early March that the country’s parliament, the Diet, will soon vote on a set of Bitcoin regulations to be put forward by the ruling cabinet.
The regulations proposed by Finance Minister Taro Aso of the ruling Liberal Democratic cabinet would classify Bitcoin as a currency, impose new requirements on Bitcoin exchanges and allow banks and securities firms to invest and trade in the virtual currency.
Following the collapse of Mt. Gox in early 2014, then the largest Bitcoin exchange in the world, Japan built a firewall separating Bitcoin from the financial sector. Banks were barred from buying and selling bitcoins, and securities firms were prevented from trading the virtual currency.
The proposed regulations would remove the firewall between Bitcoin and the financial sector, according to the Nikkei. Commercial banks would be allowed to provide Bitcoin to customers, and securities firms would be allowed to trade the virtual currency. The government hopes that removing the firewall will encourage the development of Japan’s emerging fintech industry.
The regulations, if passed by the Diet, would mark the first concrete step in a years-long debate about how to deal with Bitcoin. But not all Diet members are pleased with the proposal.
Tsukasa Akimoto, a member of the ruling Liberal Democratic party, asked Finance Minister Aso in a budget meeting in early February if maintaining the consumption tax on Bitcoin transactions would set Japan against the global trend. In response, Aso cited other countries such as Australia that also tax transactions using the virtual currency. As the proposal stands, Japan would continue to levy an 8 percent consumption tax on all purchases made with Bitcoin.
Continuing to tax Bitcoin will put Japan at a disadvantage and discourage its use by consumers, says Yuzo Kano, leader of the Japan Authority of Digital Assets, an industry group that advocates for virtual currencies. Kano says that Japan is “going against the world,” and that continuing the consumption tax will hurt Japan’s competitiveness in the emerging fintech ecosystem.
According to Kano, international Bitcoin traders make a business of “importing” bitcoins into Japan from untaxed exchanges overseas. Kano is calling for a “level playing field” to stop the importation of Bitcoin from other countries.
The U.S. Commodity Futures Trading Commission ruled in September that Bitcoin is a commodity, empowering the agency to monitor businesses that trade the virtual currency. Because Bitcoin is classified as property in the United States, states and cities can levy sales taxes on Bitcoin transactions, although none have done so. On the other side of the Atlantic, the European Union Court ruled in October that Bitcoin is a currency, not a commodity, and therefore cannot be taxed.
Of the Group of 7 countries, only Japan taxes purchases made with Bitcoin. The upcoming G7 meeting in May will be held in Japan, and how to regulate virtual currencies is set to be a major topic of discussion.
Whether or not Japan continues to tax Bitcoin transactions, Bitcoin exchanges would face increased scrutiny under the proposed regulations. Exchanges would have to meet a mandatory minimum capital requirement of 10 million yen, keep company and customer assets separate and submit to auditing by certified public accountants.
Exchanges would also be required to follow the same know-your-customer (KYC) and anti-money laundering (AML) rules as banks and other financial service providers, confirming the identities of clients and reporting suspicious trading to financial authorities.
According to Motokazu Endo, an attorney specializing in financial legislation, many of Japan’s Bitcoin exchanges have weak financial bases, which the proposed regulations could expose.
This is a guest post by Scott Dylan, and the views are those of the author.