Japan is gearing up for a significant leap in the world of digital assets as it plans to allow startups to raise funds through crypto assets as an alternative to traditional stocks. This groundbreaking development is set to provide fresh funding avenues for emerging companies, particularly those operating in the blockchain technology sector.
Expanding Investment Horizons
Japan has been behind the curve in embracing digital assets compared to other nations. However, the tides are turning. The new system, primarily applicable to Investment Business Limited Partnerships (LPS), will enable startups to receive investments in the form of crypto assets. This shift aims to diversify the types of assets accessible to limited partnerships, which are commonly utilized by venture capital firms to pool capital for startup investments while minimizing their risk exposure.
Historically, Japan confined limited partnerships to traditional assets such as shares, stock options, and security tokens in accordance with Japanese securities law. Nevertheless, the proposed rule seeks to broaden this scope to encompass a wider range of tokens and crypto assets, unlocking an underdeveloped area of investment within the country.
The Roadmap to Implementation
The Japanese government has plans to submit the necessary legal revisions to parliament as early as 2024, marking a significant stride toward creating a more crypto-friendly environment. Unlike traditional shares, blockchain-based tokens can be created swiftly without the need for intermediaries, simplifying the fundraising process for startups, particularly those engaged in Web3 technologies like blockchain.
Previously, many Japanese startups had to resort to issuing tokens in more crypto-friendly jurisdictions such as Singapore or Dubai due to restrictions preventing limited partnerships from investing in tokens. This change is poised to bring more investments within Japan’s borders, benefiting both startups and domestic investors.
Tax Code and Other Major Revisions
In addition to expanding investment options, the Japanese government is contemplating revising the tax code for fiscal 2024 and beyond. These revisions aim to exempt crypto assets and tokens from a tax on unrealized gains based on market value. This tax exemption is pivotal, as it addresses one of the barriers preventing some investors from entering the crypto market.
Venture capital firms have greeted these changes with enthusiasm. However, they caution that the revision of the limited partnership law alone may not lead to a sharp increase in fundraising via virtual currencies. Nonetheless, it undeniably creates a more conducive environment for startups to explore crypto assets as a funding avenue.
Japan also intends to eliminate restrictions on limited partnerships that previously mandated them to invest more than half of their capital domestically. This alteration is anticipated to provide investment opportunities that enhance profitability for these partnerships, ultimately affording them more capital to invest in domestic startups. The removal of these limitations aligns with Japan’s broader vision of becoming a crypto-friendly nation.
A Series of Crypto-Friendly Initiatives
Cryptocurrency exchanges in Japan, led by the Japan Virtual and Crypto Assets Exchange Association (JVCEA), have also been advocating for relaxed regulations in the country. While Japan maintains strict crypto regulations, it has lifted bans on foreign-issued stablecoins, launched a central bank digital currency pilot program, and funded metaverse and NFT-related projects. These actions underscore Japan’s efforts to harness the potential of digital assets across various sectors.
The above developments are part of a series of crypto-friendly initiatives undertaken by the Japanese government, particularly under Prime Minister Fumio Kishida’s administration. At the WebX Asia conference, Kishida emphasized his government’s commitment to promoting Web3 technologies as a disruptive force capable of stimulating social transformation. This aligns with his broader vision of fostering a “new capitalism” driven by digital innovation.
Further, Binance recently announced its availability to Japanese crypto users from August. This development follows the acquisition of the local exchange platform Sakura Exchange Bitcoin in November 2022, marking Binance’s reentry into the Japanese market.
Japan’s approach to crypto regulation has always been a delicate balancing act between fostering innovation and ensuring regulatory compliance. While the country is taking significant steps to become more crypto-friendly, it has also tightened regulations in areas such as customer information sharing by crypto exchanges to combat money laundering activities.
The Japanese government’s decision to allow startups to raise funds through crypto assets marks a pivotal moment in the country’s journey toward becoming a crypto-friendly nation. It not only signifies a shift in the regulatory landscape but also highlights the tangible ways in which digital assets can reshape traditional financial mechanisms. As Japan takes bold steps in the crypto revolution, all eyes are on the potential transformation it could bring to its startup ecosystem and its impact on the global crypto industry.