The global financial crisis of 2007/2008 wreaked havoc in the world economy and resulted in the decline in consumer wealth, widespread real estate foreclosures, evictions, business bankruptcies, prolonged unemployment and a worldwide downturn in economic activity. But not everything related to the crisis was negative. As poor banking decisions and practices faced a rude awakening by coming to a crashing halt, this allowed for new ideas to emerge, garner attention and be put in to use, especially in Japan, the Land of the Rising Sun.
As the credit crisis was in full force, Japan passed its Basic Space Law, which established Space Solar Power – the concept of collecting solar power in outer space and distributing it to Earth via satellites – as a national goal with the Japanese Space Exploration Agency. On January 9 2009, a new triple-entry accounting ledger system and the first cryptocurrency Bitcoin made its world debut by the programmer using the pseudonym Satoshi Nakamoto.
Nine years after Bitcoin launched, the economic, social and political implications of the crisis are still being felt around the world. Globally, treasury departments continue to face funding deficits with no simple resolution in sight, and the ensuing significant increases in government debt have produced several sovereign debt crises. Ultra-low interest rates from central banks trying to combat deflation have left investors scratching their heads for places to find returns on their cash.
These economic conditions led to a heightened interest in Bitcoin as an alternative investment class, since correlation with other asset classes is virtually nil, a perfect diversifier. Japan currently ranks as the largest Bitcoin market with a share of over 61 percent of global trading volume and 2.7 percent of the population holds BTC.
Softbank Group CEO Masayoshi Son, Japan’s wealthiest citizen – who is changing startup technology investing with his large checkbook, upending Silicon Valley finance – refers to these technological developments as the ‘‘disruptive, foundational technologies that are building the infrastructure for tomorrow.’’ In 2017 Masayoshi Son, backed by investors who gave him on average $1 bln per minute, launched a $100 bln technology-focused “SoftBank Vision Fund” in partnership with tech companies Apple, Qualcomm, Foxconn, and Sharp. And because investing in BTC is considered halal, investors in the fund also include Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala Investment Company. More foreign country wealth funds are eager to gain access to shares and Initial Coin Offerings (ICO) in tech companies, and are pushing for a second SoftBank Vision Fund, which plans to raise about $880 bln.
Masayoshi Son believes that with improvements both in Internet connectedness and solar power utilization, there will continue to be more global demand for digital assets. As a result, he has made investments in low earth orbit satellite company OneWeb and in solar power businesses all around the world.
Japan has a ravenous appetite for cryptocurrencies. The first Bitcoin exchange – Bitcoin Market – was established there on February 6 2010, when BTC traded for $0.30. However the exchange was shut down six months later after being scammed. In the aftermath, Japanese Mt. Gox quickly rose to prominence during the same year but met its end four years later after being hacked. This was the largest heist of a BTC exchange at the time, which has been recently superseded by the $530 mln hack of an unregistered exchange Coincheck (Japan). Coincheck is not alone, as crypto-related cybercrime is on the rise, with users and exchanges struggling to keep up with hackers and the constantly evolving methods they employ to steal money and information.
So Saito, partner at Japanese law firm So-Law, explains that “The first BTC regulations in Japan were proposed after the Mt. Gox hack, when the Banking Act and the Act on the Prevention of Transfer of Criminal Proceeds was amended, to prohibit banks and securities companies from dealing in BTC for customer accounts without registration, but allowing for proprietary trading in Bitcoin. These laws came into effect on April 1 2017, along with the Payment Services Act recognizing cryptocurrencies as a means of payment, granting them the same legal status as any other currency. So far the Financial Services Agency (FSA) of Japan has granted licenses to sixteen cryptocurrency exchanges.”
After history’s biggest Coincheck hack, the FSA stepped up its efforts to investigate Bitcoin exchanges, as well as Bitcoin’s illicit use in money laundering transactions. The FSA is also pushing for the merger of two business groups – the Japan Blockchain Association and the Japan Cryptocurrency Business Association – to establish a general incorporated association under the revised Payment Services Act in order to create a regulatory framework applicable to the crypto industry.
This is important as regulations have allowed SoftBank Investment, Sumitomo Mitsui Banking Corporation, Mizuho Financial Group Inc., and Dai-ichi Life Insurance Company to continue to invest in Bitcoin exchanges to the point of making Japan the top Bitcoin Exchange market in the world, beating out both China and the US.
The ICO market in Japan is on fire. Taizo Son, Masayoshi Son’s younger brother and founder and CEO of venture capital firm Mistletoe, predicts that ICOs, which democratize the fundraising process, will come to dominate start-up fundraising.
Currently, no laws are governing ICOs but on October 27 2017, the FSA published a statement clarifying its position on ICOs:
“ICOs may fall within the scope of the Payment Services Act and/or Financial Instruments and Exchange Act depending on how they are structured”.
In February the FSA warned an unregistered foreign ICO agency whose activities could cause investors to incur losses. Japan’s Ministry of Finance also warned an investment firm and a questionable ICO.
When Japan lifted its 8 percent national consumption tax on cryptocurrency sales in July 2017, it kick-started their across-the-board meteoric price rise. But the non-taxable nature of cryptocurrency transactions turned out to be short-lived. On September 6 2017, the National Tax Agency (Kokuzeichou) declared that profits from using cryptocurrencies were subject to individual income tax, classified as “miscellaneous income”, except for cases arising in association with activities that generate business income, such as digital currency mining, or actively trading. Miners can subtract mining overheads like facilities, power consumption, etc. from their final profit.
The top federal tax rate applicable to individual taxpayers in Japan for 2017 is higher than in the US, where it is 39.6 percent. Unlike winnings on stocks and foreign currencies, which are taxed around 20 percent, Japan’s levy on profits from cryptocurrency runs from 15 percent to 45 percent for investors who receive annual remuneration over ¥20,000,000 ($176,500) per year and miscellaneous income above ¥200,000 ($1,765). A further 10% of municipal taxes are added at every income level.
In essence this tax season, all users of cryptocurrencies will need to adopt the kind of meticulous record-keeping and price-tracking measures currently seen in the US where cryptocurrency profits will be calculated at the time of conversion into JPY (¥) and then declared in annual tax filings due between Feb.16 and March 15 2018.