Japan was among the first countries to recognize the potential of the decentralized crypto ecosystem and took significant measures to position itself as the world's crypto hub. One of the measures Japan took included the introduction of various crypto-related regulations, such as the FATF Travel Rule, aimed at preventing malicious entities from exploiting digital assets for illicit activities, including terrorist financing and money laundering.
Japan legally recognized cryptocurrencies in 2016 and further solidified their status by amending the Payment Services Act in 2019 to treat crypto assets as legal property. It led to the establishment of clear guidelines for crypto exchanges, including the need for strict anti-money laundering measures.
The country later introduced the Crypto Travel Rule in 2022, requiring exchanges to share transaction data to combat money laundering. FATF Travel Rule, however, did not become active in 2022 and instead came into force in June 2023.
The current threshold at which the Crypto Travel Rule applies to a crypto transaction in Japan is $3000. This means VASPS must transmit the required information only if the amount exceeds this limit.
In line with FATF’s Recommendations, beneficiary and originator VASPs in Japan must obtain, hold, and make available on request to appropriate authorities the following information:
- Name and account number of the originator
- Place and date of birth of originator as well as address or national identity number, customer identification number
- Name and account number of the beneficiary
The information makes it possible for authorities to track the transaction routes of crypto assets and stablecoins.
Virtual Asset Service Providers, according to Japan’s financial regulation PSA, are those that are involved in:
- Purchase, sale, and exchange of crypto assets
- Intermediating, brokering, or acting as an agent for the above-mentioned activities
- Managing customer’s money in connection with all the above-mentioned activities
- Managing crypto assets for the benefit of another person
Now, a recent development seeks to refine this regulatory framework further, with the FSA proposing to simplify the Crypto Travel Rule on January 26th this year. The new draft requires VASPs to report restricted crypto-assets to a certified payment service association and publicly disclose this information. The agency is currently receiving public comments on the proposal until February 26th, 2024.
Japan’s self-regulated crypto organization, JVCEA, also noted in its “2024 New Year’s Thoughts” notice that by revising the Act on Prevention of Transfer of Criminal Proceeds (APTCP) to implement the FATF Travel Rule, it has become the “first major developed country to do so.”
In Japan, centralized cryptocurrency exchanges are required to register with the FSA, which is responsible for overseeing banking, securities, and exchange sectors. Meanwhile, the Payment Services Act has been applied to all crypto exchanges operating in Japan since April 2017.
Moreover, through amendments to its Payment Services Act, Japan already requires exchanges to implement Know Your Customer (KYC) and Anti-money Laundering (ML) measures. Under this, crypto exchanges need to provide customer due diligence procedures, maintain records, ensure customer assets are secure, and improve their security.
Now, with the Crypto Travel Rule in place, it further tightens these regulations for crypto exchanges in Japan, as they now have to assess the money laundering and financial terrorism risks for self-hosted wallets as well.
The APTCP also plans to update its rules, requiring VASPs to collect sender and receiver information for transactions involving self-hosted wallets or unregistered VASPs, including when these transactions occur in jurisdictions where the Travel Rule is not yet enforced.
Although Japan does not mandate covering transactions with counterparties in locations that haven't yet implemented the Travel Rule regulations, VASPs must still evaluate the risks and gather necessary information. To aid this process, the FSA regularly updates its list of countries that meet Japan's Travel Rule standards.
Japan's Travel Rule sets a US$3,000 threshold for cryptocurrency transactions, higher than Singapore's SGD 1,500 and Canada's CAD 1,000, and unlike many countries that have no threshold. This stringent threshold is part of Japan's broader anti-money laundering and counter-terrorist financing strategy, which the FATF has deemed effective while also highlighting areas that could benefit from further improvements.
Moreover, according to PWC's report, Japan is among the only 23 countries that were engaged in advancing crypto-focused regulations and legislation in 2023 across all four key focus areas: Travel Rule compliance, stablecoin regulation, licensing and listing guidance, and crypto framework development.
In conclusion, Japan's adherence to clear guidelines for crypto companies and global anti-money laundering standards, exemplified by initiatives like the Crypto Travel Rule, reinforces its standing in the crypto industry amid heightened global regulatory scrutiny.
A Guide to FATF Travel Rule Compliance in the United States
A Guide to FATF Travel Rule Compliance in Hong Kong
Comprehensive Guide to Crypto Regulations and FATF Travel Rule in Singapore
A Guide to FATF Travel Rule Compliance in the UAE
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