Japan's new encryption regulation: Domestic asset holding order and stablecoin management implemented simultaneously.

Original Title: "Favourable Information: Japan's New Encryption Regulation is About to Be Implemented"

Written by: TaxDAO

In March 2025, the Japanese Cabinet passed the amendment to the Payment Service Act (PSA) submitted by the Financial Services Agency (FSA), which will be submitted to the National Diet for discussion and voting. In the history of the Japanese National Diet, no encryption-related legal changes have ever been rejected after obtaining Cabinet approval. Similarly, the Cabinet has never rejected any legal change proposals put forward by the FSA concerning Japan's encryption regulatory affairs. The FSA has a certain degree of "full authority" in Japan's encryption regulatory matters. Therefore, this amendment is highly likely to be passed in the future.

FinTax Brief Comment:

The main adjustments to the amendment include three points:

(1) Introduce a domestic asset retention order to strengthen the safety of investors' assets. According to the amended regulations, the Japanese government will have the authority to implement a domestic asset retention order on businesses operating encryption asset derivatives. The so-called domestic asset retention order refers to the requirement that commercial entities must keep their held assets within the country to prevent asset outflow during bankruptcy, which would harm the interests of creditors. Previously, for businesses that only operated encryption asset spot (physical) transactions, the Japanese government found it difficult to issue domestic asset retention orders due to the lack of relevant regulations, resulting in the risk of asset outflow for encryption asset exchanges. Therefore, this amendment to the Payment Services Act introduces relevant provisions that allow the relevant departments to issue domestic asset retention orders to businesses holding encryption asset spot (physical) transactions when there is a risk of asset outflow.

(2) Flexible management of trust-type stablecoins to enhance asset appreciation potential. Previously, issuers of trust-type stablecoins were required to maintain 100% cash reserves. While this model helps ensure the safety of stablecoins, it has shortcomings in capital utilization efficiency. In contrast, countries such as the United States, the European Union, the United Kingdom, and Singapore have allowed the inclusion of highly secure assets like short-term government bonds as part of the supporting assets for stablecoins. This revision will allow issuers of trust-type stablecoins to allocate 50% of reserve assets to short-term government bonds and time deposits, which, while ensuring liquidity safety, may increase the annualized yield of the issuer by 1.5%-2%.

(3) Establish a "intermediary business" system for encryption assets to optimize market access thresholds. According to current laws, even as just an intermediary, companies that connect cryptocurrency exchanges and users must comply with the same regulatory requirements as those directly engaged in cryptocurrency trading. The amendment to the "Payment Services Act" establishes a specific category for "intermediary business" and implements a registration system for these intermediary companies. Although these intermediary companies still need to fulfill certain disclosure obligations and comply with advertising norms, they are no longer required to meet the same regulatory conditions as exchanges since they do not directly custody user assets.

The recent amendment to the "Payment Services Act" reflects three major trends in Japan's encryption regulation: First, the Japanese government is increasingly recognizing the importance of encrypted assets in national strategy. The introduction of domestic asset retention regulations demonstrates the government's attempt to use legal means to prevent capital outflow, strengthen the protection of the domestic encryption market, and promote the stable development of the domestic encryption industry. Second, Japan is actively aligning with international regulatory standards and promoting policy upgrades. The adjustments regarding stablecoin management in this amendment draw on the policy experiences of countries such as the United States, the European Union, and the United Kingdom, allowing short-term government bonds and time deposits to serve as stablecoin supporting assets. This indicates that Japan is striving to catch up with mainstream international regulatory trends to enhance its encryption industry's international competitiveness. Finally, by establishing a category for encryption asset "intermediary services," Japan aims to distinguish between encrypted asset companies and intermediaries, supplemented by differentiated regulatory standards.

The amendment to the Payment Services Act has multiple positive implications for Japanese encryption investors: First, the introduction of domestic asset custody regulations can ensure that even in extreme situations such as corporate bankruptcy, Japanese investors' assets can remain within the country and be protected by Japanese financial regulatory authorities, reducing the risk of asset loss. Second, reforms in stablecoin management allow investors using trust-based stablecoins to enjoy the stability of demand deposits while also gaining opportunities for appreciation from short-term government bonds and time deposits, balancing the security of funds with appreciation potential. Additionally, the establishment of an intermediary business system lowers market entry barriers, which can attract more innovative companies into the market, potentially accelerating the diversification and maturation of the Japanese encryption market.

Overall, the amendment bill of the Payment Services Act promoted by the Financial Services Agency of Japan reflects its emphasis on the development of the encryption market and demonstrates its determination to strengthen investor protection and optimize the regulatory framework. For Japanese encryption investors, this series of changes will bring a safer, more efficient, and more flexible investment environment, further promoting the sound development of Japan's encryption industry.