A public statement by the Japanese Financial Services Agency (FSA) warns investors about risks attached to Initial Coin Offerings (ICOs) and details two existing Japanese laws that apply to token sales.
Japan's FSA: ICOs Are Risky
In the statement published on Friday 27 October, the Agency clarifies its position on ICOs and warns investors of two risks.
The first risk is token price volatility. FSA explained that "the price of a token may decline or become worthless suddenly."
The second risk is that ICOs have "potential for fraud." Specifically, FSA cautioned that goods and services outlined in the so-called whitepaper of an ICO may not be realized. The Agency further added:
"You should have a deal [invest] at your own risk only after understanding enough the risks above and the content of an ICO project if you buy a token. You should also pay careful attention to suspicious solicitation of ICOs."
ICOs in Japan: Two Existing Laws May Apply
In April 2017, Japan's FSA began recognizing virtual currency such as bitcoin as a legal form of payment. Last month, on September 13, the Agency announced a new team of 30 officials tasked with virtual currency exchanges' regulation, which includes many standards such as a minimum capital holding of 10 million yen (approximately $90,000), and a positive net asset balance. But regulation of ICOs was unclear until know.
According to the new FSA's statement, there are already two Japanese laws that may regulate ICOs.
Businesses launching an ICO should know 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."
FSA said that ICO tokens that have the characteristics of a digital currency fall under the virtual currency provisions of the Payment Services Act. In this case, the agency stressed, companies providing digital currency exchange services "must be registered with each Local Finance Bureau that is the delegated authority to the Prime Minister." At the moment, eleven crypto exchanges have been approved by the agency.
The Agency also wrote that "if an ICO has the characteristics of an investment, and the purchase of a token by a virtual currency is practically deemed equivalent to that of legal tender, the ICO becomes subject to regulations under the Financial Instruments and Exchange Act."
ICOs Are Growing In Japan
ICOs are booming in Japan. Small and large companies are actively trying to raise money through token offerings. For instance, Japan’s internet giant, GMO, announced plans to use an ICO to fund its next-gen 7nm bitcoin mining boards. SBI Group, a financial services company, is also launching two ICO businesses: a financing business and a rating information business through Morningstar Japan.
Tech Bureau, operator of Zaif exchange, launched a platform called Comsa last August. Comsa is a "one-stop solution that includes a creation of multi-language whitepaper, pre-configured token sale dashboard, blockchain integration services and PR services, dedicated for your own ICO" according to Tech Bureau
Singaporean bitcoin exchange Quoine, which has presence in Japan, announced in October the launch of a global ICO known as the Qash. Both Quoine and Zaif were among the eleven bitcoin exchanges approved by the FSA in September.
Furthermore, Chinese bitcoin exchanges are reportedly trying to move their ICO businesses to Japan. According to the leading Japanese bitcoin exchange Coincheck, the company has received "hundreds of requests from Chinese startups and startups around the world asking us to list their tokens, after the Chinese government banned ICOs."