The Takeaway

• Japan’s politicians are taking the lead on Web3 policymaking, a sharp departure from the usual process in the nation.
• Lawmakers have already published a white paper addressing issues including tax reform and non-fungible tokens (NFT).
• Crypto bills, including metaverse-related item, are likely to be introduced next year.

Japan's political leaders want to take the country into the Web3 era without the bureaucratic slog that’s typical for the nation’s policymakers.

So far this year, a handful of politicians have been driving crypto and Web3 policy forward on their own, publishing reports and proposing updates to existing laws and regulations. That rapid push began earlier in the year when Japan Prime Minister Fumio Kishida designated Web3 a pillar of economic reform.

A prime minister ‘who listens’

Kishida of the Liberal Democratic Party (LDP) was elected prime minister in November 2021. Web3 aligns with his administration’s agenda of economic recovery and revitalizing local communities, and could be a way to attract private investment back to Japan and fulfill his campaign promise of growth and wealth distribution.

“The crypto market cap had become a size that no government in this world could ignore,” Arisa Toyosaki, founder of decentralized finance (DeFi) options market Cega, said. “Investors, traders and founders combined could make a fairly significant bump in Japanese economic metrics,” she said.

Kishida’s administration established a policy office dedicated to Web3 under the Ministry of Economy, Trade and Industry, or METI, although it is likely other government bodies, including those responsible for finance, tax and justice, will also be involved in forming crypto policies.

Politicians in charge

In Japan, policies are usually designed by the bureaucracy, but with Web3 the politicians have taken the lead instead. As a result, a policy drafting process that might ordinarily take months has taken weeks.

In the case of Web3, Takuya Hirai, a former minister for digital transformation, appointed LDP politician Masaaki Taira to head a NFT (non-fungible token) working group that was established in January.

A veteran lawmaker who has served in office since 2005, Taira has a deep understanding of how LDP policymaking works and has persuaded Kishida to support crypto and Web3 policy.

In a Twitter post made shortly after the working group was established, Taira said NFTs and blockchain represent a growth strategy for the country.

LDP politician Akihisa Shiozaki, who was elected to Japan’s House of Representatives last year, has taken the lead on developing Web3 policy recommendations.

Within months, the group published a white paper, a kind of technical manifesto, that said the country needed a Web3 minister and a one-stop shop consultation desk so private companies and entrepreneurs would no longer need to contact multiple ministries. Many of its proposals are about clarifying guidelines and standards.

The “NFT white paper” was released in April. It “was very unique,” Shiozaki told CoinDesk, in that it took only three months and was drafted by politicians and lawyers, not by bureaucrats.

If the white paper had followed the bureaucratic route, it would have undergone a long process of 10 or so meetings, each meeting two or three weeks apart, and the government would have called in scholars, formed an advisory board and asked for public comment.

By circumventing that process, Shiozaki said he shortened the process by nine months.

He also avoided the white paper getting tangled up with interest groups.

“We wanted to start small and grow it,” Shiozaki said. “Otherwise, we would get a lot of interference from various interest parties.” The group started with NFTs because the digital tokens were attracting a lot of attention at the time.

Still, although the paper was titled “NFT White Paper,” Shiozaki pointed out that the subtitle is “Japan’s NFT strategy for the Web 3.0 era,” which he said “broadens it a lot.”

Support from Kishida

The paper was delivered to Prime Minister Kishida. On May 5 he gave a speech in London pledging to “develop an environment for the promotion of Web3,” citing blockchain technology, NFTs and the metaverse.

“Kishida’s commitment made in the speech led to strong political momentum in support of Web3 policies,” Shiozaki said.

In June, Web3 was mentioned in the “honebuto,” a document that outlines the government’s broad plans for the future. The document said that crypto legislation will be sent to Japan’s parliament next year.

“The biggest hurdle is to get everyone to understand what we’re talking about,” Shiozaki said.

In August, when he reshuffled his cabinet, Kishida appointed Taro Kono, one of the nation’s most powerful politicians, as digital minister. Kono, known for his willingness to confront bureaucratic traditions, will be a key figure in pushing policy to develop Web3 in the country.

Tax reform

One big issue in Japan when it comes to crypto is taxes. Companies that issue digital tokens must pay a tax on unrealized gains for tokens they are holding if those tokens are listed on an “active market,” like a big crypto exchange. (It’s unclear whether a decentralized exchange counts as an active market.)

The NFT white paper proposed that tokens held by companies be taxed only when the tokens are sold for a profit or generate income through a transfer.

Shiozaki calls the tax reform a “litmus test” on whether the government is serious about crypto. Tax debates in Japan usually take place from the middle of November to early December, and are formalized in the ruling party’s annual tax reform proposal.

“We’ve been repeatedly saying, if we miss this boat we miss it forever,” he said. “We are going to push very hard to resolve this issue.”

The Japan Cryptoasset Business Association and Japan Blockchain Association (JBA), has developed proposals for tax reform to the government.

Yuzo Kano, co-founder of crypto exchange bitFlyer, will submit proposals to Japan’s Financial Services Agency (FSA) in his capacity as head of the JBA. He plans to explain these to Web3 proponents in Japan’s parliament.

The JBA wants the government to nix corporate taxes on unrealized capital gains for crypto issued or held by corporations, tax crypto capital gains at the same 20% rate as stocks, allow losses to be carried forward for three years, and tax individuals on their crypto only when they convert it to fiat currency, Kano said.

Kano said the first proposal on corporate taxes will likely pass, but the others likely won’t.

In August, Japan’s Financial Services Agency and METI indicated that they intend to revise corporate tax laws so that companies pay a tax only when they generate a profit from selling tokens.

Meanwhile, discussions about other crypto-related issues are still in progress.

Masakazu Masujima, a partner at law firm Mori Hamada and Matsumoto and a former official at the Financial Services Agency, argues for simplifying processes like listing tokens, which can involve a 60-page due diligence report for each token.

Shiozaki said that he had heard complaints from token-based businesses struggling to get proper accounting and auditing services, because accounting firms don’t like dealing with crypto due to a lack of clear accounting rules and precedents.

Crypto workers

Yet another issue: attracting talented crypto-savvy people to Japan.

Sota Watanabe, founder of Astar Network, a platform that supports transactions on multiple blockchains, said that Japan stands at a “significant disadvantage” at the moment, compared with jurisdictions like Singapore and Dubai, because of its tax laws. In his view, Japan hasn’t had many successful crypto projects and is behind on accumulating talent.

He said that while tax reform is welcome, the government needs to do more to attract entrepreneurs to Japan. He suggested a crypto visa so that the country could attract top talent from across the globe.

Finally, there’s the national interest. Masujima said he considers the NFT white paper as a “collection of small changes in the legal system,” rather than a big strategy.

He has communicated with the FSA on how it could be more proactive in engaging major layer 1 blockchains and showing that the government is supportive. This could entail nurturing relationships with high-quality projects and finding ways to reduce risks associated with private wallets, which are used to store crypto anonymously and off centralized platforms like exchanges.

At the present time, Masujima said, the FSA is more focused on what the international regulatory community decides than on making homegrown policies. “It’s time for us to draw a big picture,” he said.