Japanese law currently has no specific regulations for ICOs. But Japan's financial watchdog, the FSA (Financial Services Agency) issued an open letter of warning, stating its view that "ICOs may fall within the scope of the Payment Services Act and/or the Financial Instruments and Exchange Act depending on how they are structured." (October 27, 2017). Since we have examined the Financial Instruments and Exchange Act in the last post, we will now turn to the Payment Services Act to see the extent of its geographical outreach.
The Payment Services Act regulates the "exchange services of virtual currencies" by imposing registration and other requirements for providing the services (Article 63-2, etc.). It defines the concepts of "virtual currencies" (Article 2(5)) and "exchange services of virtual currencies" (Article 2(7)). At the time of writing, it is uncertain whether any tokens issued in ICOs are deemed to be "virtual currencies." We will assume, for the sake of the following analysis, that some of them will be so deemed. The "exchange services of virtual currencies" signifies carrying out any of the conducts listed in Article 2(7) "in the course of trade", a phrase which is usually interpreted as implying repeated and continuous conducts. The listed conducts include the sale and purchase of virtual currencies and exchanging between different virtual currencies. Thus, cryptocurrency exchanges, or entities so called, will generally be seen to be providing "exchange services of virtual currencies." Some commentators seem to believe that the issuers of ICO tokens (if deemed to be "virtual currencies"), too, provide "exchange services of virtual currencies" on the basis that ICOs would involve the purchase of tokens (deemed ex hypothesi to be "virtual currencies") or exchanging them with other virtual currencies. But I doubt the correctness of this interpretation since the issuance of ICO tokens can hardly be described as repeated and continuous conducts. The appropriateness of such interpretation is also doubtful since the issuer of ICO tokens, if treated as a provider of "exchange services of virtual currencies", would be subject to disproportionately heavy duties of compliance. The Payment Services Act also contains the definition of "foreign provider of exchange services of virtual currencies": it refers to any person who pursues the "exchange services of virtual currencies" in a foreign country who has effected registration of the same kind as required under Article 63-2 (or has received other similar administrative authorization such as a permission) pursuant to that country's statutes or statutory instruments which are equivalent to the Act (Article 2(9)). Even if the words "other similar administrative authorization" are construed broadly, it would be rare for any ICO issuers operating from outside Japan to have received such authorization. It follows that although the following analysis - which concerns the "foreign provider of exchange services of virtual currencies" - will be relevant to some of the foreign cryptocurrency exchanges dealing in ICO tokens which are deemed to be "virtual currencies", its relevance to the issuers of such ICO tokens operating from outside Japan is doubtful.
The Payment Services Act provides at Article 63-22:
The foreign providers of exchange services of virtual currencies who are not registered pursuant to Article 63-2 shall not make solicitations aimed at persons located in Japan with respect to any conducts listed in the sub-paragraphs of Article 2(7).
(Annotation: Article 63-2 prohibits any person to pursue the "exchange services of virtual currencies" without registration. Article 2(7) lists the conducts which, if carried out "in the course of trade", would constitute the "exchange services of virtual currencies".)
The FSA published "Administrative Guidelines" for the providers of "virtual currency exchange services". It contains a sub-chapter concerning the treatment of the "foreign provider of exchange services of virtual currencies" (II-４: Framework of Analysis for Foreign Providers of Exchange Services of Virtual Currencies). So far as I am aware, the FSA has not published an English translation of those guidelines. For the convenience of foreign readers, I have translated the text (below).
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II-4 Framework of Analysis for Foreign Providers of Exchange Services of Virtual Currencies
II-4-1 Prohibition Against Solicitation by Foreign Providers of Exchange Services of Virtual Currencies
Foreign providers of exchange services of virtual currencies (excluding those who have been registered pursuant to the applicable law. Ditto under II-4-2 below.) shall not make solicitations of transactions involving their services with persons located in Japan, save to the extent otherwise stipulated by statutes or statutory instruments.
II-4-2 Cross-border Transactions Using Internet by Foreign Providers of Exchange Services of Virtual Currencies
Where a foreign provider of exchange services of virtual currencies posts on its website or elsewhere on the internet advertisements or other contents concerning transactions involving their services, it shall in principle be deemed to be a “solicitation.”
It shall, however, not be deemed to be a “solicitation” aimed at persons located in Japan if reasonable measures are taken to prevent the advertisement or other contents from resulting in transactions with such persons, the prime examples of such measures being those detailed below.
(1) Disclaimer
The disclaimer must clearly state that the exchange services are not targeted at persons located in Japan.
In judging whether the above measure is adequately taken, it is necessary to have regard to the following points:
(i) whether the disclaimer is legible simply by viewing the advertisement or other contents without any additional operations on the computer terminal required; and
(ii) whether the disclaimer is written in a language which it would be reasonable to expect the persons accessing the website in Japan to understand.
(2) Measures to Prevent Transactions
These are measures implemented to avoid concluding transactions involving the exchange services of virtual currencies with persons located in Japan.
In judging whether such measures are adequately taken, it is necessary to have regard to the following points:
(i) whether a procedure is put in place whereby the whereabouts of the users can be checked at the time of transactions by requiring them to present their details such as their place of domicile, postal address, e-mail address and their chosen method of payment;
(ii) whether care is taken to avoid accepting orders for transactions involving the exchange services of virtual currencies where there are reasonable grounds to believe that they have been obviously sent from persons located in Japan; and
(iii) whether care is taken to avoid inducing persons located in Japan to engage in transactions involving the exchange services of virtual currencies by, for example, refraining from establishing in Japan a call center for users or creating links from web pages which are targeted at persons located in Japan.
The above-mentioned measures are illustrative only. If measures which are equivalent or more effective are implemented, the posting of advertisements or other contents shall not be deemed to be a “solicitation” aimed at persons located in Japan.
(3) It should be noted that where reasonable measures, such as those detailed above, are not implemented, the posting of advertisements or other contents on the internet is highly likely to constitute a “solicitation” of transactions involving the exchange services of virtual currencies aimed at persons located in Japan. Such being the case, the foreign provider of exchange services of virtual currencies should prove that it is not engaged, by way of solicitations, in transactions involving the exchange services of virtual currencies with persons located in Japan.
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What is stated under II-4-1 is only a reiteration of Article 63-22 of the Payment Services Act (See above). It is worth noting that what foreign providers are prohibited to do is the solicitation of transactions aimed at persons located in Japan: Concluding unsolicited transactions with such persons is not prohibited unless it is done "in the course of business" (hence repeatedly and continuously) in violation of Article 63-2. However, II-4-2 gives a broad interpretation to the notion of "solicitation aimed at persons located in Japan" as it states that the posting of an advertisement on the internet is highly likely to constitute such a solicitation unless reasonable measures are implemented to prevent transactions with persons located in Japan. Moreover, it places the onus on foreign providers to prove that they are not engaged in such solicitations.
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