Japan’s crypto market matures while regulations expand

Binance Japan’s business partnership with PayPay is an ambitious push to make crypto an everyday payment tool in Japan’s fragmented, yet rapidly evolving market. 

The crypto market in Japan is entering a new phase of mainstream adoption after PayPay, the SoftBank and Yahoo Japan-backed payments giant, took a 40 percent stake in Binance Japan to link cryptocurrency with mainstream digital payments. 

Japan’s crypto ecosystem is evolving into a two-track system with regulated, institution-backed innovation led by big name companies and gray-zone activities of unregistered crypto exchanges operating in Japan as well as other emerging crypto-related crimes.

Japan embraces cryptocurrency 

The Binance Japan deal is expected to intensify competition for new crypto users in Japan. In 2023, major Japanese e-commerce marketplace, Mercari, launched its own crypto exchange platform named Mercoin, which surpassed one million users in seven months and currently boasts more than three million users. The vast majority are first time crypto traders. 

The public’s enthusiastic reception of Mercoin caught the company by surprise.

“The growth has been extremely fast – well beyond our expectations,” Mercoin’s representative Tamotsu Kobayashi said in an interview with Cryptopolitan. 

He said the perception of cryptocurrency is changing in Japan, moving from an image associated with being “scary” and “complicated” to one that is increasingly “familiar” and “accessible.” The shift also involves moving past the idea that high initial funding is needed.

So Saito, a Japan-based lawyer specializing in fintech, believes Japan’s crypto asset market has matured, evident with an increase in users and trading volume. But, despite official data showing more than 12 million crypto trading accounts have been opened in Japan, most holdings are small, with over 80 percent of individual accounts containing less than $675.

Saito said following the major electronic retailer Bic Camera’s introduction of Bitcoin payments in 2017, public interest in crypto shifted from payments to investment. In turn, Japan’s regulatory framework has also developed in that direction. 

Japan regulators tighten crypto oversight

Currently, the Financial Services Agency (FSA), is considering moving crypto assets from the Payment Services Act (PSA) to the Financial Instruments and Exchange Act (FIEA) in order to strengthen investor protection and maintain consistency with securities regulation. The discussions align with Japan’s Finance Minister Katsunobu Kato’s statement that “crypto assets will be recognized as part of investment portfolios.”

The proposed classification of crypto assets under Japan’s securities law could serve as the catalyst for sweeping tax incentives. This reform would shift crypto gains from the current maximum 55 percent tax bracket, under miscellaneous income, to a uniform 20 percent capital gains rate.

Consumer appetite for crypto payments is on the rise, but the growing market is forcing regulators to crack down on illicit operators. Behind the scenes, the FSA monitors a continuous stream of unregistered crypto exchanges operating in Japan. At the end of 2024, the FSA flagged some 20 foreign and domestic unauthorized crypto exchanges soliciting Japanese residents. 

Japan mandates a rigorous regulatory oversight for crypto firms. Under the PSA, all crypto exchanges must register with the FSA. They are further monitored by the Japan Virtual and Crypto Assets Exchange Association (JVCEA), which sets binding rules on asset custody, token listings, leverage limits, and anti-money-laundering (AML) measures.

Police crack down on crypto gambling crimes

The regulatory perimeter, however, is being increasingly challenged by crypto’s role in offshore crime. Japan’s National Police Agency (NPA) is also on high alert for crypto crimes. It has reported a string of cases linking crypto with illegal online gambling and betting. 

Japan bans most private gambling, allowing only government-run sports betting and lotteries. Still, growing acceptance of crypto has made it easier for residents, including minors, to access foreign, online casinos that fall outside Japan’s regulatory reach.

On October 8, a 13-year old boy was apprehended by police for using his allowance as well as stolen cash to purchase crypto and place bets on overseas online casinos. On the same day, local media reported the arrest of a 19-year old man for operating an unregistered crypto exchange and using the proceeds to gamble online. 

The arrests highlight the growing pains of a market where crypto use is expanding faster than regulatory enforcement.

“Japan’s crypto industry is still in a developing stage compared with overseas markets,” Mercoin’s Kobayashi said.

“We believe it’s important to first energize the industry on the whole and help more people recognize crypto as something that is familiar and approachable.”

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