Norbert Gehrke, founder and representative director at Tokyo Fintech, an initiative that supports community-led innovation in Japan’s financial services sector, notes that the country’s economy and business transactions are still “highly paper-based.”
Gehrke has worked as managing director at Goldman Sachs’ Technology Division and Barclays Investment Bank.
He points out in a blog post that many transactions in Japan still require physical stamping with a personal or corporate seal before they can be processed.
He adds:
“It is fair to assume that the current pandemic will be a catalyst for digital transformation…the Cabinet Office recently published a self-assessment on digital channels to access pandemic subsidies and support programs. Across offline applications, seal requirements, and the need to submit physical documentation, the challenge was illustrated well. However, acceptance is the first step to change.”
Commenting on Japan’s thriving cryptocurrency and blockchain sector, Gehrke mentioned that the country began accepting Bitcoin (BTC) as legal tender back in 2017. Japan is also one of the first countries to create regulations for digital assets and distributed ledger technology (DLT) platforms.
At present, there are 23 licensed virtual currency exchange operators in Japan, Gehrke confirmed.
Last year in March, the nation’s financial regulator, the Financial Services Agency (FSA), suggested that certain changes be made to the Payment Services Act (PSA) and the Financial Instruments and Exchange Act (FIEA), in order to provide more protections for crypto asset investors. These updated regulations and guidelines became effective (largely unchanged) on May 1, 2020.
Going on to explain how the new rules will impact Japan’s digital currency industry, Gehrke wrote:
“[The] now effective rules draw a clear line between crypto assets covered under the PSA (with the new addition of crypto asset custody), and crypto asset derivatives and security tokens covered under the FIEA.”
He added:
“In practice, this means that regulation for cryptocurrency exchanges has become even stricter (aforementioned custody rules, segregation of customer assets, 100% cold wallet requirement for customer assets, exchange assets to at least match hot wallet holdings) while at the same time restricting the business further – leverage on margin transaction has been limited to 2x.”
He continued:
“Generally, security tokens transferable through a blockchain will be deemed ‘Type I Securities’ – equivalent to highly liquid securities like stocks, bonds, investment unit trusts – under the FIEA, and their purchase, sale and intermediation will require the corresponding ‘Type I Financial Instruments Business Operator (FIBO)’ license, putting the established brokers firmly in charge.”
Gehrke also shared important updates about Japan’s Open Banking developments.
He noted that Europe’s Open Banking guidelines include provisions to permit “limited free use” of the compulsory APIs. He confirmed that the FSA has adopted a “hands-off” approach and allowed different parties to negotiate the commercial terms on their own.
He added:
“The banks wish to recoup the cost of the Open Banking implementation, which might make the fees prohibitive for startups, especially if it is based upon costly and inflexible legacy architecture.”
He believes that digital banks will eventually “distinguish themselves by opening without restrictions, thus creating the platforms the [Open Banking] regulation intended.” He feels that there’s “significant value to be captured by Open APIs in the SME funding space.”