Will Japan's encryption regulation face a major turning point? FSA proposes tax reform and system integration to attract institutional investors.

The Financial Services Agency (FSA) of Japan has initiated a new round of regulatory discussions at the Financial System Council, proposing the idea of incorporating encryption assets into the TradFi system and considering friendly adjustments to the tax system. This reform could not only revitalize Japan's long-stagnant encryption volume but also attract more domestic and foreign institutional investors to enter the market.

The high taxation on encryption hinders market development.

Japan has long been known for its clear and sound regulation of encryption assets, with relatively complete regulations for stablecoins and exchanges. However, innovation is often constrained by the current tax system, particularly due to the miscellaneous income tax that levies up to 55% on profits from encryption asset transactions, which deters many potential investors and results in insufficient market liquidity.

FSA Proposed System Integration: Incorporating the Financial Instruments and Exchange Act

At the meeting on June 25, the Financial Bureau proposed a potentially significant change: to include encryption assets under the Financial Instruments and Exchange Act, treating them equally with traditional financial products such as stocks. If this proposal is implemented, profits from encryption asset transactions will no longer be regarded as miscellaneous income but will be subject to the same 20.3% separate taxation system as stocks, significantly reducing the tax burden, which is undoubtedly a major positive for investors.

Scholarly Perspective: The Challenge of Balancing Innovation and Regulation

Professor Naoyuki Iwashita from Kobe University pointed out that applying TradFi regulations to encryption transactions is not easy, especially in the context where decentralized and anonymous transactions are becoming more prevalent. He emphasized that regulatory designs need to be more sophisticated. He specifically highlighted the need to establish effective mechanisms to prevent fraud and protect investors' rights in token offerings such as ICOs and IEOs.

Professor Kōsuke Kawaguchi from Tongji University also believes that while it is reasonable to adjust encryption assets by referencing existing securities laws, designing insider trading rules for tokens without a clear issuer remains a significant challenge. He suggests drawing on global regulatory experiences to establish more flexible regulations.

Institutional Investors' Attitude Shift: Incorporating Encryption Assets into Asset Allocation

According to a joint survey released in June 2024 by Numera Holdings and Laser Digital, the acceptance of encryption assets among institutional investors in Japan has significantly increased. The survey shows that 62% of respondents believe that encryption assets are a viable asset diversification tool, with more than half indicating a clear intention to invest in the next three years.

Among them, most institutions hope to allocate 2% to 5% of their assets to encryption assets, with up to 80% planning to hold them for at least a year, indicating that they no longer view encryption investments as short-term speculation, but rather incorporate them into formal asset management strategies.

New Capitalism Action Plan: Government fully promotes digital assets

On June 13, the Japanese Cabinet passed a revised version of the "New Capitalism Outline and Action Plan," clearly expressing support for digital transformation and wealth innovation. The document specifically mentions the importance of encryption assets and NFTs in addressing social issues and enhancing productivity, and emphasizes the need to create a trustworthy and secure investment environment for them. The plan also points out that the current tax system should be reviewed, considering a separate taxation similar to stocks for encryption assets, and integrating them under financial services regulations to establish a comprehensive investor protection framework.

Currently, Japan's monthly encryption trading volume is approximately 3 trillion yen (about 20 billion USD). If the new tax system and regulatory framework are implemented, it will undoubtedly attract more capital inflow, further boosting volume and market vitality.

The most anticipated development is the introduction of Bitcoin ETF products. If institutions are allowed to participate as in the United States and Europe, Bitcoin ETFs will not only enhance liquidity but also possibly gain widespread recognition from mainstream investors for encryption assets.

Despite the optimistic outlook, experts still remind that regulation should not overly suppress innovation. Professor Kato Saori from the National Policy Research Institute pointed out that regulatory measures should be precisely designed to ensure consumer protection while avoiding the stifling of blockchain and Web3 innovation momentum; otherwise, Japan may lose its competitive edge in the global arena.

Will this article mark a significant turning point for Japan's encryption regulations? The FSA proposes tax reforms and system integration to attract institutional investors. First appeared in Chain News ABMedia.