ICO organizers looking to tap Japan’s lucrative investment market must still follow local laws, says the country’s leading blockchain industry lobby group. Offshore fundraisers should exclude Japanese residents if they didn’t want to risk civil and/or criminal penalties — including fines and up to five years in prison.
Being Offshore Doesn’t Protect You – Japan Blockchain Association
The Japan Blockchain Association (JBA) said today there’s a misconception internationally that Japan does not regulate ICOs, and that foreign-registered entities may solicit sales within Japan without regard for local laws.
JBA’s statement, posted online, said Japan has no specific ICO regulations and does not prohibit all ICOs. However, this does not mean Japan allows all ICOs.
“Existing financial regulations such as security and collective investment scheme regulations, and virtual currency or prepaid payment instrument regulations may apply to some kinds of ICOs.
Even if those regulations do not apply, other laws such as civil law, commercial transaction law, consumer protection law, and criminal law would almost always apply to ICOs.”
Formed in April 2016, the JBA includes representatives from the Japanese government and some of the country’s top blockchain industry firms. It seeks to promote blockchain technology development by lobbying for responsible regulation and encouraging responsibility among its members.
Japan Market Too Lucrative to Resist
Wealthy, advanced economies with large populations of sophisticated investors — mainly the U.S. and Japan — are an attractive proposition for ICO organizers. China also has a large pool of wealthy individuals hungry for new asset classes.
Fear of attracting the ire of the U.S. Securities and Exchange Commission (SEC) and China’s flat-out ICO ban have led ICOs to seek KYC information from token buyers and/or exclude those countries completely.
Japan residents in the blockchain industry are now familiar with requests to “help us find someone to promote our ICO in Japan”. However, it’s not as simple as hiring a translator and marketer.
Permissive to ICO Sales, Digital Currencies – Within Tight Boundaries
Japan’s regulators have been permissive towards digital currency and blockchain innovation, but have set tight boundaries. Japan regards all ICO tokens as “virtual currencies” under its law — of which only approved types may be sold, and only by entities licensed to do so.
JBA cited an October 2017 warning from the Financial Services Authority (FSA) that ICOs may be covered by the Payment Services Act (PSA) and/or the Financial Instruments and Exchange Act (FIEA). The FSA cautioned that some ICOs could be fraudulent and token buyers were participating at their own risk.
Only registered Virtual Currency Exchange Business Operators may handle token sales in Japan. Even then, the tokens themselves still need to be submitted to and approved by the FSA before going on sale.
Penalties for breaking this law are up to three years’ prison time and/or a ¥3 million JPY ($27,000 USD) fine.
Token Sales May Be Covered by Other, Non-Financial Laws
Japanese authorities may also deem an ICO a “collective investment schemes (fund)”, if it collects money from others for investment and pays dividends.
Organizers must register as a Type II Financial Instruments Exchange Business Operator, or risk five years’ imprisonment and/or a ¥5 million ($45,000) fine.
Even ICOs not covered by the above financial regulations may still be subject to other business practice laws, JBA added. The Specified Commercial Transaction Act requires full disclosure of organizers’ identities and contact details, and prohibits “extravagant advertising”.
ICO organizers must also follow basic consumer protection laws and adequately explain the nature of the tokens and sale to all buyers. Failure to do so means buyers could legally demand a refund.
Potentially Expensive Risk
The fines probably seem small compared to a nine-figure ICO raise, and the chance of arrest leading to imprisonment may be remote for a foreign-based entity. For tokens sold mainly in other digital currencies like ethereum or bitcoin, it may be impossible to know where the sales are coming from.
However any business wanting to appear legitimate and trustworthy, compliance would still be necessary. Japanese authorities could also take steps to stop a solicitation campaign or attempt to seize any funds raised. That’s a potentially expensive risk.
Is Japan’s approach to ICOs and digital currencies reasonable? Let’s hear your thoughts.
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