Relevant Period:This historical article discusses observations published in August 2017 and supplemented in September of that year. The original assumption that an ICO means an exchange listing, and the inference that registration is unnecessary before listing, have been corrected. The supplementary explanation below also uses the Financial Services Agency's explanation issued on October 27, 2017, after the original publication.

In a blog post approximately two months ago, “Taxation of Cryptocurrencies and Virtual Currency Exchange Businesses,” I wrote:

3. Does Conducting an ICO Constitute a Virtual Currency Exchange Service?

ICOs (Initial Coin Offerings) are a hot topic in cryptocurrency circles.

The following articles provide useful background on ICOs.

　Ethereum Based BAT ICO Raises $36 Million in 30 Seconds to Disrupt Advertising
　http://www.trustnodes.com/2017/05/31/ethereum-based-bat-ico-raises-36-million-30-seconds-disrupt-advertising

The article above describes an ICO by BAT, an advertising-related token (tokens are also a type of cryptocurrency), which raised approximately JPY4 billion in 30 seconds.

Other examples include the following.

Bitcoin News: Keynes's Bancor Currency Revived for the Modern Era Raises JPY16.7 Billion Through a Blockchain ICO
　http://btcnews.jp/5k8o872y11509/

These are astonishing amounts, and I expect startups in Japan may seek to conduct ICOs. If these tokens also constitute virtual currency under the amended Payment Services Act, their activities would seem to fall precisely within “(i) purchase and sale of virtual currency or exchange for another virtual currency” conducted “in the course of business.” My personal view is therefore that registration as a virtual currency exchange service provider is required.

 
However, I feel that I did not sufficiently examine the premise, “if these tokens also constitute virtual currency under the amended Payment Services Act.” This article follows up on that point.

Table of Contents
1. The Difference Between Cryptocurrency and Virtual Currency
2. Developments Overseas
3. ICOs, Token Sales, and Exchange Listings
4. Article 2, Paragraph 5 of the Payment Services Act
5. Article 2, Paragraph 7 of the Payment Services Act
6. Is a Virtual Currency Exchange Service License Required at the Token Sale Stage?

1. The Difference Between Cryptocurrency and Virtual Currency

In the previous blog post, I also mentioned my personal understanding that “cryptocurrency” is a conceptual term, while “virtual currency” is a term defined in Japanese legislation.

In a Venn diagram, cryptocurrency is the larger circle, and virtual currency is the smaller circle within it.

2. Developments Overseas

Based on articles such as the following, my understanding is that, at present, the United States may be one of the only jurisdictions regulating this area under legislation equivalent to Japan's Financial Instruments and Exchange Act.

TechCrunch: Tech Bureau Announces COMSA, an ICO Fundraising Platform Using Japan's Virtual Currency Law
　http://jp.techcrunch.com/2017/08/03/ico-platform-comsa/

The following is a quotation.

A year later, in a report released on July 25, 2017, the SEC (U.S. Securities and Exchange Commission) concluded following its investigation of The DAO that its tokens were securities subject to regulation. The DAO represented business risk in digital token form and was therefore subject to securities law.

3. ICOs, Token Sales, and Exchange Listings

The cryptocurrency mentioned above, “Ethereum Based BAT,” currently ranks 34th by cryptocurrency market capitalization, at approximately JPY23 billion. From what I observed, the day after its token sale (a presale of its proprietary Ethereum-based BAT token), it was poloniex“listed” on the exchange.

An ICO generally means raising funds from the public by issuing tokens and is also called a token sale. It does not mean the exchange listing itself. The original article treated an ICO as equivalent to a listing for purposes of its analysis; that use of the term is corrected here.

4. Article 2, Paragraph 5 of the Payment Services Act

The Payment Services Act is the next point to examine.

Which cryptocurrencies constitute “virtual currency” as defined by law?

Payment Services Act, Article 2 (Definitions)

5. In this Act, “virtual currency” means the following:
(i) Property value that can be used to pay unspecified persons for goods purchased or borrowed or services received, and that can be purchased from and sold to unspecified persons (limited to value recorded electronically on electronic devices or other objects, and excluding Japanese currency, foreign currency, and currency-denominated assets; the same applies in the following item), which can be transferred using an electronic data processing system.
(ii) Property value that can be mutually exchanged with unspecified persons for the property value listed in the preceding item and can be transferred using an electronic data processing system.

In other words,

• When you buy or borrow goods or receive services from another party,
• among so-called cryptocurrencies with property value “recorded electronically on electronic devices or other objects,”
• those that “can be used to pay unspecified persons, and can be purchased from and sold to unspecified persons”

appear to constitute “virtual currency.”

Also,

• Property value “recorded electronically on electronic devices or other objects” that can be “mutually exchanged with unspecified persons for the property value listed in the preceding item” by being “transferred using an electronic data processing system” (meaning it may not necessarily need to be used to buy goods or receive services as described above?)

also appears to constitute “virtual currency.”

The first category of virtual currency, under Article 2, Paragraph 5, Item (i) of the Payment Services Act, seems to fit assets currently usable with “unspecified persons,” such as Bic Camera and Marui, including Bitcoin very closely.

The second category, under Item (ii) of the same paragraph, seems to cover cryptocurrencies exchangeable over the internet or elsewhere with unspecified persons for Bitcoin and similar assets—in other words, cryptocurrencies listed on exchanges.

TechCrunch previously published the following article.

TechCrunch: VALU Lets People Trade Their Own Value Like Shares, Using Bitcoin for Purchases
　http://jp.techcrunch.com/2017/06/01/valu/

Reading it now, it says:

(Editor's note, June 2, 2017, 6:11 p.m.: Paragraphs 1, 12, and 13 have been supplemented and revised because the description of Bitcoin's treatment within and outside VALU was incomplete.)

However, I recall the final paragraph saying something to the effect that, based on discussions with the FSA, VALU did not appear to qualify as virtual currency under the Payment Services Act. (This is from memory, so I apologize if it is incorrect.)

Indeed, a token that cannot be used to purchase goods or services at Bic Camera, Marui, or similar retailers, is not listed on an exchange, and cannot be exchanged with unspecified persons might be considered cryptocurrency but not virtual currency.

However, the absence of an exchange listing alone does not establish that a token falls outside the then-current definition of virtual currency under the Payment Services Act. The statutory conditions, including how the token can be used or exchanged, must be examined.

Update: September 5, 2017
I have continued thinking about this in various ways...
On VALU, each person has a BTC-denominated value and there is an order book. If this means it can be exchanged for Bitcoin, I wonder whether it falls under Article 2, Paragraph 5, Item (ii) of the Payment Services Act.

5. Article 2, Paragraph 7 of the Payment Services Act

Here too, The Payment Services Act is the next point to examine.

Payment Services Act, Article 2 (Definitions)

7. In this Act, “virtual currency exchange services” means conducting any of the following activities in the course of business, and “exchange of virtual currency and related activities” means the activities listed in Items (i) and (ii).
(i) Purchase and sale of virtual currency or exchange for another virtual currency
(ii) Intermediation, brokerage, or agency for the activities listed in the preceding item
(iii) Management of users' money or virtual currency in connection with the activities listed in the preceding two items that the provider conducts.

In other words,

• Selling or exchanging virtual currency such as Bitcoin at a sales outlet or exchange “in the course of business,”
• providing “intermediation, brokerage, or agency” for those activities, or
• managing “users' money or virtual currency” in connection with them

would appear to make one a virtual currency exchange service provider.

Whether registration is required cannot be determined solely by distinguishing a presale before listing from a sale after listing. It depends on the token's legal classification under the law at the time and whether its sale, purchase, exchange, or related activities are conducted in the course of business.

Each activity listed in the statute must be examined, including whether it constitutes the purchase or sale of virtual currency, rather than considering only whether it is an exchange for another virtual currency. The token's label alone cannot establish that registration is unnecessary.

As an aside, OTC transactions might also fall outside virtual currency exchange services if they are not conducted “in the course of business.”

6. Is a Virtual Currency Exchange Service License Required at the Token Sale Stage?

I initially thought registration might be unnecessary for sales before listing, but I correct that inference insofar as it relied solely on listing status. Using the label “cryptocurrency” does not mean an asset falls outside the statutory definition of “virtual currency.”

On October 27, 2017, after this article was published, the FSA explained that, depending on their structure, ICOs may be regulated under the Payment Services Act, the Financial Instruments and Exchange Act, or other legislation, and registration and other obligations must be fulfilled. Specific businesses require an assessment based on the legal nature of their tokens and transaction activities.

 
These are my personal views and may contain errors. If you think something is incorrect, please feel free to contact me and I will reconsider it. In practice, there appear to be a variety of opinions and differing conclusions.

These observations are personal, and our office and company accept no liability for any losses arising from reliance on them. Anyone planning an actual token sale or cryptocurrency business should consult their legal adviser or another appropriate professional before undertaking transactions.

Materials Consulted for the Correction

• Financial Services Agency: ICOs (October 27, 2017)