## 1jpnea2024008

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### Executive summary — scope and timing
- Technical note reviewing regulation, supervision, and systemic risk monitoring of fintech in Japan.
- Focus areas:
  - Institutional arrangements for fintech monitoring.
  - Regulatory perimeter reviews and amendments on digital payments, banking, and crypto assets.
  - Regulatory framework for crypto assets and the FSA approach to licensing and supervision of crypto exchanges.
- Prepared by Ms. Cristina Cuervo with input from Mustafa Yenice. On-site work: January 2024. Information current as of January 2024.

### Fintech landscape: key findings and statistics
- Market concentration and growth:
  - Fintech market in Japan is growing, mostly concentrated in the digital payments sphere.
  - Cashless payment ratio: 21.3 percent (2017) → 36.0 percent (end 2022).
- Digital payments activity:
  - FTSPs transactions (2022): approximately JPY 7.5 trillion; number of payments: approximately 2.3 billion.
  - FTSPs transactions (2020): approximately JPY 2.3 trillion; payments: 450 thousand.
  - Annual issuance of PPIs: JPY 29.5 trillion (2022); JPY 23.7 trillion (2017).
- Product development:
  - Emergence of potential “SuperApps” consolidating payments, credit, insurance and asset management.
- Crypto market:
  - Crypto activity picking up under a relatively mature regulatory regime; several stablecoin initiatives underway though no issuance yet.
  - Historical incidents (2014, 2018) prompted progressively stricter regulatory framework (strict asset handling, hard limits on leverage trading).

### Institutional framework and FSA monitoring
- FSA roles and organization:
  - Monitors fintech via industry outreach, licensed-firm data analysis, engagement with SROs and study groups.
  - Fintech Policy Office coordinates fintech regulatory and supervisory work.
  - Fintech-related monitoring offices and responsibilities include:
    - Payment Services Monitoring Office (FTSPs and PPIIs).
    - Crypto Asset Exchange Service Providers Monitoring Office (CESPs; stablecoin regime and EPISP registration/supervision).
    - Financial Services Intermediary Business and Electronic Payment Service Providers Office.
  - Total FSA staff involved in fintech matters: approximately 70; Fintech Policy Office staff: approximately 50.
- Supervision coordination:
  - Joint supervision with Local Finance Bureaus (LFBs); FSA determines direct supervision based on criteria (share of account holders, assets, service complexity).
- Suggested improvement:
  - Develop a more systematic approach to data gathering to enable a domestic outlook and financial stability analysis.

### Digital payment services: risks and supervisory priorities
- Monitoring and supervisory priorities:
  - Fast growth warrants intensified monitoring and enhanced supervision of FTSPs and PPIIs.
  - Ensure transition to cashless payments does not increase systemic or consumer protection risks.
- Specific supervisory suggestions:
  - In absence of specific capital requirements for FTSPs, consider requiring entities to develop wind-down plans in the event of an FTSP failure.
  - Carry out analysis to determine whether the requirement for third-party PPIIs to retain only 50 percent of funds transmitted by clients remains adequate given rapid sector growth.
  - Enhance supervision of significant FTSPs and intensify monitoring of FTSPs and PPIIs.
- PPII-specific proposals:
  - Analyze adequacy of 50 per cent asset retention; consider expanding requirement to cover 100 percent of funds, at least for third-party PPIs.

### Crypto adoption, exchanges and market activity
- Adoption and ranking:
  - Chainalysis 2023 Global Crypto Adoption Index: Japan ranked 18th.
  - Central Council for Financial Services Information survey (2019): penetration of crypto assets was 7.8 percent of individuals in the study sample.
- Exchange landscape and volumes:
  - Number of registered CESPs: 29.
  - Domestic accounts on crypto exchanges as of end November 2023: about 8.6 million.
  - Top three providers account for approximately 60 percent of domestic accounts.
  - Average annual trading volume in the top three exchanges for 2023: JPY 3.18 trillion (Spot trading: JPY 2.18 trillion; Margin trading: JPY 1.00 trillion).
  - FY22 spot transaction composition: Bitcoin (BTC): 70.06 percent; Ethereum (ETH): 16.11 percent; XRP (XRP): 6.88 percent; Litecoin (LTC): 0.54 percent; Bitcoin Cash (BCH): 0.01 percent; Others: 6.12 percent.
  - Demographics: majority of account holders are in their 30s and 40s.
- Observed trends:
  - Number of accounts at exchange service providers has doubled since 2018 (JVCEA).
  - Domestic trading volumes have remained low since 2021, aligned with Bitcoin price decline and stricter regulatory requirements.

### Crypto regulatory regime, stablecoins and security tokens
- Timeline and scope:
  - PSA first amended to introduce crypto regulation in May 2016; reform entered into force April 2017 (introduced CESP category, disclosure, minimum capital/net assets, external audits, asset segregation, system security, AML/CFT).
  - 2020 reform introduced cold-wallet requirement, conflict-of-interest systems, notification prior to listing new crypto assets, market integrity measures.
  - 2022 reform entered into force June 2023: introduced stablecoin regime; trust banks/companies and FTSPs can issue stablecoins; separate EPIESP license for stablecoin exchanges/wallets.
- Security tokens:
  - FIEA amended to introduce Electronically Recorded Transferable Rights (ERTRs) or security tokens; treated under FIEA and subject to securities regulation; issuance very limited and activity restricted to primary market.
- Stablecoin specifics:
  - Electronic Payment Instruments Service Provider (EPISP) license (stablecoin exchange/wallet): 0 (as of end December 2023).
  - Approximately 9 projects under consideration to issue stablecoins; no final official application to the FSA at reporting time.
  - Reserve requirements differ by issuer type (trust bank/company vs FTSP); issuers must be able to respond to redemption demands and provide disclosure on stablecoin functioning.
  - No foreign stablecoin is yet available for trading in Japan; no SRO certified by the FSA yet regarding stablecoins.

### CESP licensing, requirements and supervision
- Licensing and staff:
  - Since 2017 a total of 34 CESP licenses have been granted; currently 29 licensed CESPs in operation.
  - CESP registration team: approximately 6 staff (at least three from CESP Monitoring Office plus legal, AML/CFT and IT experts).
  - Registration process takes on average over one year (documentation review, management interviews, onsite visit).
- Key regulatory requirements (areas preserved as in source):
  - AML/CFT: KYC, identity verification at account opening, record keeping, suspicious transaction reporting.
  - Capital requirements: minimum capital of JPY 10 million; net assets must not be negative; annually audited financial statements.
  - Governance/conflicts of interest: internal rules, monitoring, public disclosure of conflict management policy.
  - Order handling/trade disclosures: disclose execution method, prices, fees, trade and reference prices, and CESP identification details.
  - Record keeping: maintain adequate records of all transactions, including off-chain, for at least 10 years.
  - Listing: JVCEA screening prior to listing; “green list” for assets listed in at least 3 CESPs.
  - Market integrity: prohibition of market abuse (rumor spreading, manipulation, insider trading); surveillance requirements.
  - Custody: strict segregation of users’ funds and crypto assets; annual external audits of segregation; crypto assets in cold wallet; less than 5 percent in hot wallet with offsetting cold-wallet holdings by the CESP.
  - Leverage: individual investors limited to borrowing up to twice their initial investment; corporate leverage set weekly by JVCEA (historical high around 10 times).
  - IT/operational risk: sufficient control of electronic data processing systems.
  - Marketing: clear risk disclosures; prohibition on unsolicited contact.
- Supervision and enforcement:
  - Supervision shared with LFBs; about one-third of 29 CESPs under direct FSA supervision.
  - Offsite reporting: monthly transaction data to JVCEA; JVCEA aggregates and submits to FSA monthly; annual Regulatory Business Report; quarterly segregation reports.
  - Onsite inspections mainly by LFBs with FSA participation for IT and AML/CFT.
  - Administrative measures available to FSA: business improvement orders, business suspension orders, registration revocation orders; FSA cannot impose monetary penalties.
  - JVCEA disciplinary actions: reprimands, fines, suspension/limitation/expulsion; JVCEA fines up to JPY 100 million or up to JPY 500 million for significant violations (possible addition for unjust enrichment).
  - FSA has imposed approximately 30 administrative measures since 2017 (mostly business improvement orders).
  - Warnings on non-licensed providers: three warnings for domestic non-registered CESPs and 13 regarding foreign non-registered CESPs in the last five years.
  - FSA screens social media, consumer complaints and collaborates with law enforcement and Consumer Affairs Agency; no broader investor education program on crypto risks beyond warnings/alerts.

### Case study — FTX (lessons)
- FTX collapsed in November 2022 (Bahamas domicile; local operations including Japan).
- FTX Japan actions and outcomes:
  - Kept adequate books and records; segregated client funds in trust and crypto in cold wallets per Japanese requirements.
  - Local IT dependence on FTX global halted trading simultaneously; FTX Japan suspended customer withdrawals on November 8, 2023 (US time).
  - Kanto LFB issued administrative orders on November 10 to suspend business (except redemption), retain assets in Japan, and a business improvement order.
  - FTX Japan announced on November 14 it held excess assets; IT dependencies delayed asset returns until February 21, 2023.
- Takeaways:
  - Japanese client-asset segregation supported return of client assets and those assets were determined not to be part of FTX’s estate under US bankruptcy procedures, but IT dependencies and cross-border insolvency uncertainty delayed returns.
  - FSA amended Guidelines to require global CESPs to ensure IT systems/processes enable client redemptions irrespective of overseas operations and to notify clients of potential foreign insolvency impacts.

### Banking digitalization, tokenization, and other fintech segments
- Digital banks and open banking:
  - No official regulatory definition of “digital bank”; FSA guidance contemplates fully online banks (“digital banks”).
  - First digital bank licensed in 2000; number of digital banks registered with the FSA: 11.
  - First smartphone-app-only digital bank licensed in 2020; reached almost 600,000 accounts in its first two years.
  - Total accounts held by top five traditional banks: approximately 320 million.
  - Open banking permitted; 118 licensed Electronic Payment Service Providers; almost all banks have contracts with one or more.
- Robo-advisors and cloud:
  - Leading robo-advisor asset manager AUM: JPY 928 billion as of September 2023; AUM were JPY 203 billion in 2019.
  - Cloud adoption: 67 percent had adopted cloud services as of end March 2022; 46.7 percent as of end March 2018.
- Tokenization and insurtech:
  - Tokenized Real Estate trust fund units: approximate issuance size JPY 23 billion.
  - Tokenized corporate bonds: approximate issuance size JPY 1.8 billion.
  - No issuance of tokenized deposits yet.
  - Insurtech remains nascent; Government Sandbox hosted a few insurance-related projects.

### Licenses and counts (as of end December 2023)
- Crypto Asset Exchange Service Provider (CESP) — Unbacked crypto asset exchange/wallet: 29
- Electronic Payment Instruments Service Provider (EPISP) — Stablecoin exchange/wallet: 0
- Fund Transfer Service Provider (FTSP) — Electronic payment services (e.g., QR code): 84
- Pre-paid Payment Instrument Issuer (PPI) — Issuer of pre-paid cards:
  - 1,192 (self)
  - 866 (3rd party)
- Electronic Payment Service Provider (EPSP) — Gateway payment services (usually via open APIs): 118
- Financial Services Intermediaries Business Operators — Provision of intermediary services in relation to any licensed financial service (insurance, securities or banking): 8

### Findings and consolidated recommendations
- Findings (preserved):
  - Japan has developed a comprehensive conduct and prudential regulatory framework for CESPs with key safeguards (strict asset segregation, compulsory cold wallets), detailed licensing/listing screening, and offsite/onsite supervision.
  - FSA devotes sufficient time and resources to CESP licensing and supervision and screens new crypto assets with JVCEA and LFBs.
  - Institutional arrangements for fintech oversight appear adequate; FSA engages with industry and analyzes licensed-firm reporting data.
- Key recommendations (timing and authorities preserved where given in Table 1):
  - Institutional arrangements:
    - Develop a more systematic approach for the collection and analysis of domestic fintech related data. Timing: ST. Authorities: FSA.
    - Continue to work with the Local Finance Bureaus (LFBs) to ensure adequate supervision of fintech-related registrants. Timing: I. Authorities: FSA, LFBs.
  - Digital payment service providers:
    - Intensify monitoring of FTSPs and PPIIs considering their fast growth. Timing: I. Authorities: FSA.
    - Enhance supervision of significant FTSPs. Timing: ST. Authorities: FSA.
    - Require FTSPs to develop wind-down plans. Timing: ST. Authorities: FSA.
    - Carry out analysis to determine whether 50 per cent asset retention requirement for third-party PPIIs remains adequate. Timing: ST. Authorities: FSA.
  - Crypto assets:
    - Broaden background of CESP monitoring/supervision by incorporating securities markets expertise in the team. Timing: ST. Authorities: FSA.
    - Work with industry and SROs to study how market surveillance approaches could be better tailored to identify market abuse specifically for crypto assets. Timing: ST. Authorities: FSA.
    - Enhance investor education approach regarding crypto assets and CESPs. Timing: ST. Authorities: FSA.
    - Strengthen enforcement approach:
      - (i) review the FSA’s enforcement program and consider including monetary penalties as part of available tools,
      - (ii) monitor enforcement approach by the JVCEA to ensure adequate use of its enforcement powers.
      Timing: ST. Authorities: FSA.
  - Additional supervisory actions:
    - Incorporate a securities secondary markets expert into the CESP Monitoring Office.
    - Review enforcement tools and consider whether monetary penalties for the FSA would increase deterrence, particularly for foreign unlicensed providers.
    - Broaden investor education beyond warnings and alerts to reduce user access to unregulated markets.
- Coordination and capacity building:
  - Ensure supervisory priorities and potential areas of concern are communicated to LFBs and that LFBs receive regular training on fintech risks.

### Central Bank digital currency (BOJ) context
- BOJ CBDC status and experimentation:
  - BOJ has no plans to issue a CBDC but conducted technical experiments:
    - Proof of Concept concluded in March 2023.
    - Pilot program initiated in April 2023 without an end date to develop an end-to-end experimentation system; experimentation remains at an early stage and no decision on the model has been made.
    - Pilot program does not include real-world testing and is complemented by a CBDC Forum involving about 60 private-sector participants.

*Source: EXECUTIVE SUMMARY (Technical Note), 1jpnea2024008 — information current as of January 2024.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Introduction
- This technical note reviews the functioning and effectiveness of the regulation, supervision, and systemic risk monitoring of fintech in Japan.
- Focus areas:
  - Institutional arrangements for fintech monitoring.
  - The approach Japanese authorities have taken to review the regulatory perimeter around fintech-related issues, including regulatory amendments on digital payments, banking, and crypto assets.
  - The regulatory framework for crypto assets and the FSA approach to licensing and supervision of crypto exchanges.
- Prepared by Ms. Cristina Cuervo (Senior Financial Sector Expert, Monetary and Capital Markets Department of the IMF) with input from Mustafa Yenice. On-site work was conducted during January 2024. The information in this note is current as of January 2024.

### Fintech landscape: key findings and statistics
- Fintech market in Japan is growing, mostly concentrated in the digital payments sphere.
- Cash and credit cards remain prevalent, but use of QR code and smartphone app payment services by Fund Transfer Service Providers (FTSPs) and Prepaid Payment Instrument Issuers (PPIIs) has significantly increased in recent years.
- Cashless payment ratio increased from 21.3 percent in 2017 to 36.0 percent at end 2022.
- FTSPs handled approximately JPY 7.5 trillion in annual transactions in 2022, and the number of payments reached approximately 2.3 billion in 2022 (compared with approximately JPY 2.3 trillion in transactions and 450 thousand payments in 2020).
- Annual issuance of PPIs increased to JPY 29.5 trillion in 2022, from JPY 23.7 trillion in 2017.
- Some firms are developing financial applications that consolidate payments, credit, insurance and asset management services (potential “SuperApps”).
- Crypto activity: picking up under a relatively mature regulatory regime and experienced players; several stablecoin initiatives are underway although there has been no issuance yet.
- Historical context: severe hacking incidents in 2014 (Mt. Gox) and 2018 prompted introduction of a gradually stricter regulatory framework, including strict asset handling requirements and hard limits on leverage trading.

### Institutional framework and FSA monitoring
- The Financial Services Agency (FSA):
  - Monitors fintech developments through multiple channels and responds with targeted regulatory initiatives.
  - Has a Fintech Policy Office to internally coordinate fintech regulatory and supervisory work.
  - Monitors developments via industry outreach, analysis of data from licensed firms, and engagement with Self-Regulatory Organizations (SROs) and study groups.
  - Is in charge of licensing and supervision of fintech-related firms: FTSPs, PPIIs, Crypto-asset Exchange Service Providers (CESPs), and other fintech registrants for provision of intermediation within financial services (e.g., through the use of open Application Programming Interfaces).
- Suggested improvement:
  - Develop a more systematic approach to data gathering to enable the FSA to have a domestic outlook and, as needed, carry out analysis from a financial stability perspective.

### Digital payment services: risks and supervisory priorities
- The fast pace of growth in digital payment services warrants intensified monitoring and enhanced supervision of relevant players.
- Specific observations and suggestions:
  - The authorities should ensure the transition to cashless payments does not come at the expense of potential risks.
  - The FSA should closely monitor developments to determine whether current regulatory safeguards remain adequate.
  - In the absence of specific capital requirements for FTSPs, the FSA may consider requiring entities to develop wind-down plans in the event of an FTSP failure.
  - Carry out analysis to determine whether the requirement for third-party PPIIs to retain only 50 percent of funds transmitted by clients remains adequate given rapid sector growth.

Key statistics (preserved exactly as reported)
- Cashless payment ratio: 21.3 percent (2017) → 36.0 percent (end 2022).
- FTSPs transactions (2022): approximately JPY 7.5 trillion; number of payments: approximately 2.3 billion.
- FTSPs transactions (2020): approximately JPY 2.3 trillion; payments: 450 thousand.
- Annual issuance of PPIs: JPY 29.5 trillion (2022); JPY 23.7 trillion (2017).

### Regulation and supervision of crypto assets: framework and assessment
- Japan has developed a comprehensive conduct and prudential regulatory framework for CESPs:
  - Basic framework introduced in 2017, including AML/CFT measures and certain user protection requirements.
  - The regime has evolved to incorporate more stringent user protection, prudential, and conduct of business requirements.
  - Key safeguards: strict asset segregation requirements and compulsory use of cold wallets.
  - Detailed screening at licensing and listing, and both offsite and onsite supervision of licensed firms.
- FSA actions regarding non-regulated entities:
  - Monitors provision of services by non-regulated entities to Japanese clients and issues warnings and public alerts.

### Crypto supervision: gaps and recommended enhancements
- Suggested FSA actions (to better address crypto specificities and market integrity):
  - Strengthen customer education on the risks regarding crypto assets and overall functioning of crypto asset markets, beyond warnings and alerts.
  - Review effectiveness of enforcement program against non-licensed firms, including whether the use of monetary penalties could increase deterrence.
  - Work with industry and SROs to improve market surveillance approaches of CESPs so they adequately address specificities of crypto asset markets and improve identification of market abuse conducts.
  - Broaden background of CESP monitoring/supervision by incorporating securities markets expertise in the team.

### Table 1: Recommendations on Regulation and Supervision of Fintech (preserved timing and authorities)
- Institutional arrangements
  - Develop a more systematic approach for the collection and analysis of domestic fintech related data. Timing: ST. Authorities: FSA.
  - Continue to work with the Local Finance Bureaus (LFBs) to ensure an adequate supervision of fintech-related registrants. Timing: I. Authorities: FSA, LFBs.
- Digital payment service providers
  - Intensify monitoring of FTSPs and PPIIs considering their fast growth. Timing: I. Authorities: FSA.
  - Enhance supervision of significant FTSPs. Timing: ST. Authorities: FSA.
  - Require FTSPs to develop wind-down plans. Timing: ST. Authorities: FSA.
  - Carry out analysis to determine whether 50 per cent asset retention requirement for third-party PPIIs remains adequate. Timing: ST. Authorities: FSA.
- Crypto assets
  - Broaden background of CESP monitoring/supervision by incorporating securities markets expertise in the team. Timing: ST. Authorities: FSA.
  - Work with industry and SRO to study how market surveillance approach could be better tailored to identify market abuse specifically for crypto assets. Timing: ST. Authorities: FSA.
  - Enhance investor education approach regarding crypto assets and CESPs. Timing: ST. Authorities: FSA.
  - Strengthen enforcement approach:
    - (i) review the FSA’s enforcement program and consider including monetary penalties as part of available tools,
    - (ii) monitor enforcement approach by the JVCEA to ensure adequate use of its enforcement powers.
    Timing: ST. Authorities: FSA.
- Timing legend: I Immediate (within 1 year); ST Short Term (within 1-2 years); MT Medium Term (within 3−5 years).

### Additional contextual points cited in the note
- The Bank of Japan (BOJ) currently has no plans to issue a central bank digital currency (CBDC) but has been conducting technical experiments:
  - Conducted a Proof of Concept that concluded in March 2023.
  - Initiated a pilot program in April 2023 without an end date to develop a system for experimenting with the end-to-end process.
  - Experimentation remains at an early stage and no decision has been made regarding the model to be used for CBDC.
  - The pilot program does not include real-world testing and is complemented by a CBDC Forum involving about 60 participants from the private sector.
- Guidance and standards referenced (as of January 2024) include publications and standards from the FSB, BCBS, IOSCO, World Bank–IMF Bali Fintech Agenda, IMF Fintech Notes, and the IMF and FSB Synthesis Paper: Policies for Crypto Assets.

*Source: EXECUTIVE SUMMARY (Technical Note), 1jpnea2024008 — information current as of January 2024.*

### 8.   Crypto penetration seems to be slowly picking up. Chainalysis has recently included Japan

### 8.   Crypto penetration seems to be slowly picking up. Chainalysis has recently included Japan

### Crypto adoption and international ranking
- Chainalysis 2023 Global Crypto Adoption Index: Japan ranked 18th.
- Other G-7 peers in top-20: US (4th), UK (14th), Canada (19th).
- Most other jurisdictions in the top-20 are emerging market economies.
- Central Council for Financial Services Information survey (2019): penetration of crypto assets was 7.8 percent of individuals in the study sample.

### Crypto exchange landscape and market activity
- Number of registered crypto exchange service providers (CESPs) in Japan: 29.
- Domestic accounts on crypto exchanges as of end November 2023: about 8.6 million.
- Top three providers account for approximately 60 percent of domestic accounts.
- Average annual trading volume in the top three exchanges for 2023: JPY 3.18 trillion.
  - Spot trading: JPY 2.18 trillion.
  - Margin trading: JPY 1.00 trillion.
- Observed trends:
  - Number of accounts at exchange service providers has doubled since 2018 (JVCEA).
  - Domestic trading volumes have remained low since 2021, in line with the decline in Bitcoin prices and probably due to gradually stricter regulatory requirements.
- FY22 composition of crypto spot transactions:
  - Bitcoin (BTC): 70.06 percent.
  - Ethereum (ETH): 16.11 percent.
  - XRP (XRP): 6.88 percent.
  - Litecoin (LTC): 0.54 percent.
  - Bitcoin Cash (BCH): 0.01 percent.
  - Others: 6.12 percent.
- Demographics: Majority of account holders are in their 30s and 40s.

### Regulatory regime for crypto and stablecoins
- Japan adopted rules for exchanges early on in 2017.
- Stablecoin regime introduced in June 2023.
- Japan is one of the first countries to develop a comprehensive regime for crypto assets and stablecoins for prudential and conduct purposes, and has the longest track record of licensing and supervising crypto asset exchanges for these purposes.
- Electronic Payment Instruments Service Provider (EPISP) license (stablecoin exchange/wallet): 0 (as of end December 2023).
- Several entities have projects under consideration to issue stablecoins; based on contacts with the FSA and public statements, approximately 9 projects are currently underway in varying stages of development. No final official application to the FSA had been made for clearance at the time of reporting.

### Banking sector digitalization and fintech adoption
- No official regulatory definition of "digital bank"; FSA “Comprehensive Guidelines for Supervision of Major Banks, etc.” contemplates fully online banks without physical branches, generally referred to as “digital banks.”
- First digital bank licensed in 2000; number of digital banks registered with the FSA: 11.
- First digital bank to operate exclusively via smartphone app licensed in 2020; it reached almost 600,000 accounts in its first two years.
- For comparison, total number of accounts held by the top five traditional banks: approximately 320 million.
- Incumbents increasingly provide Banking as a Service via partnerships with non-financial institutions (Electronic Payment Service Providers, Financial Service Intermediaries and Bank Agents).
- Open banking is permitted; most banks have developed systems for open APIs.
- Robo-advisors:
  - Leading asset manager using robo-advisors held JPY 928 billion in AUM as of September 2023.
  - AUM for that manager were JPY 203 billion in 2019 (four-fold increase over four years).
- Cloud adoption in financial institutions:
  - 67 percent had adopted cloud services as of end March 2022.
  - 46.7 percent had adopted cloud services as of end March 2018.

### Tokenization and insurtech
- Tokenization market is very small and mostly concentrated in:
  - Tokenized Real Estate trust fund units: approximate issuance size JPY 23 billion.
  - Tokenized corporate bonds: approximate issuance size JPY 1.8 billion.
  - No issuance of tokenized deposits yet.
- Insurtech remains at a very nascent stage with few fintech-related initiatives in the insurance sector; most firms still rely on physical offices and traditional client onboarding.
- Government Sandbox has hosted a few insurance-related projects.

### Institutional framework, sandbox, and policy guidance
- Japan does not have a specific Fintech strategy; initiatives are guided by government-wide policies (Grand Design and Action Plan for a New Form of Capitalism, June 2022; Basic Policy on Economic and Fiscal Management and Reform).
- FSA Strategic Priorities (2022-23) commit to realizing a digital society and developing a favorable environment for digital money and crypto assets to support Web 3.0 and the Metaverse.
- Regulatory Sandbox:
  - Managed by the Government of Japan at Cabinet level; FSA involved for financial services projects.
  - Established in 2018; more than 30 projects approved (2018-2023).
  - Only three Sandbox case studies to date related to FSA purview: two on insurtech and one on crypto asset exchange service providers.
  - Cabinet Secretariat acts as a single point of entry and coordinates with competent ministries; FSA participates in screening and monitoring for projects under its purview.
  - During approved trials, two or three FSA staff are involved in monitoring through regular reporting and meetings.

### FSA organization and fintech monitoring
- Fintech Policy Office: main coordinator for fintech issues within the FSA; approximately 50 staff.
- Fintech and Innovation Office (within Fintech Policy Office) operates the Fintech Support Desk as a one-stop contact for fintech inquiries, licensing applicability, and regulator engagement.
- FSA fintech-related monitoring offices and responsibilities:
  - Payment Services Monitoring Office: registration, monitoring and supervision of FTSPs and PPIIs.
  - Crypto Asset Exchange Service Providers Monitoring Office: registration, monitoring and supervision of CESPs; responsible for new stablecoin regime and registration/supervision of EPISPs.
  - Financial Services Intermediary Business and Electronic Payment Service Providers Office: registration and supervision of Financial Services Intermediaries Business Operators and Electronic Payment Service Providers.
- Supervision coordination:
  - Supervision is done jointly with Local Finance Bureaus (LFBs); FSA handles overall monitoring and offsite supervision of most relevant firms while LFBs handle offsite supervision of remaining firms and onsite supervision with FSA assistance for IT systems.
  - FSA determines direct supervision of firms based on criteria like share of account holders, assets, complexity of services, etc.
- Other FSA offices involved in fintech:
  - AML/CFT Policy Office: AML/CFT policy and monitoring related to fintech.
  - Research Office of the Policy Markets Bureau: AML/CFT regulatory development.
  - Banking and Payment Regulations Office: development of payment and crypto regulation.
  - International Affairs Office: participation in Standard Setting Bodies and International Organizations.
  - Securities Business Division: issues regarding security tokens.
- Total FSA staff involved in fintech matters: approximately 70.

### FSA outreach, research, and coordination
- FSA established the Study Group on Digital and Decentralized Finance (DeFi), composed of industry, academia and lawyers; secretariat role performed by the FSA. The group has met approximately every two to three months to analyze digital/DeFi developments and regulatory needs.
- FSA commissions research from private research companies on topics such as on-chain and off-chain data, technology risk in the trust chain in DeFi, international regulatory trends, enforcement, and market challenges related to unfair trading in crypto assets.
- FSA meets regularly with industry and SROs, and conducts bilateral meetings with fintech participants and licensed entities to understand trends and regulatory challenges.
- Data gathering: FSA does not carry out data collection beyond information from licensed firms; it analyzes data from CESPs, PPIIs, and FTSPs to monitor market growth, user base and pace of development.

### Licenses and counts (as of end December 2023)
- Crypto Asset Exchange Service Provider (CESP) — Unbacked crypto asset exchange/wallet: 29
- Electronic Payment Instruments Service Provider (EPISP) — Stablecoin exchange/wallet: 0
- Fund Transfer Service Provider (FTSP) — Electronic payment services (e.g., QR code): 84
- Pre-paid Payment Instrument Issuer (PPI) — Issuer of pre-paid cards:
  - 1,192 (self)
  - 866 (3rd party)
- Electronic Payment Service Provider (EPSP) — Gateway payment services (usually via open APIs): 118
- Financial Services Intermediaries Business Operators — Provision of intermediary services in relation to any licensed financial service (insurance, securities or banking): 8

*International Monetary Fund — Chapter content (1jpnea2024008).*

### 29.   Due to investor protection concerns in early crypto asset activity in the country, this

### 1jpnea2024008 - 29.   Due to investor protection concerns in early crypto asset activity in the country, this

### Security tokens and Electronically Recorded Transferable Rights (ERTRs)
- The Financial Instruments and Exchange Act (FIEA) was amended to introduce the concept of Electronically Recorded Transferable Rights (ERTRs) or security tokens.
- Security tokens are treated as "Electronically Recorded Transferable Rights24" and, further to this amendment, are subject to the regulations under the FIEA.
- Issuers of security tokens must comply with the same regulations as issuers of traditional securities, including registration and disclosure requirements, and compliance with securities laws.
- Issuance of these instruments has been very limited and activity restricted to the primary market (i.e., placement of the issuance).

*Footnote terms preserved as in source: "The full term as per FIEA is “Electronically Recorded Transferable Rights to be Indicated on Securities, etc.”"*

### Prudential and supervisory approach to crypto asset holdings
- The FSA has introduced prudential requirements for financial sector intermediaries’ holding of crypto assets.
- Currently, banks and insurance companies are prohibited from acquiring crypto assets for the purposes of investment (both directly, as well as indirectly via derivatives or funds).
- There is no limitation on holdings of crypto or crypto derivatives for Type I Financial Instrument Intermediaries (FIBOs, Japanese securities firms), but currently there are no Type I FIBOs engaged in securities related business holding crypto assets.
- Supervisory Guidelines for FIBOs include:
  - Holding of crypto assets as a specific point of attention for supervisory purposes.
  - Expectations including segregated management of the assets and a specific control environment to secure financial soundness given crypto’s particular risks.

### Digital payments regulatory reforms and FTSP categorization
- The Payment Services Act (PSA) (came into effect in 2010) enabled entities to register with the FSA as Fund Transfer Service Providers (FTSPs).
- The PSA was amended in 2021 to respond to technological developments and demand for cashless payments; amendments include reforms on requirements for FTSPs and enhancements to regulation of issuers of prepaid payment instruments.
- The amended PSA establishes three separate categories of FTSPs:
  - Type I FTSPs: no maximum amount per transaction.
  - Type II FTSPs: limit of JPY 1 million per transaction.
  - Type III FTSPs: can carry out transactions of up to JPY 50,000.
- Regulatory requirements differ by type:
  - Type I FTSPs: stricter standards on preservation of clients’ assets and restrictions on retention of funds from clients.
  - All three types must preserve assets in an amount equal to or greater than the sum of outstanding obligations and refund costs; this can be met by depositing cash or highly liquid assets with the Official Depository, a trust bank/trust company or having a bank guarantee.
  - FTSPs must comply with AML/CFT requirements, have adequate systems, and provide sufficient information to users, including disclosing that funds deposited with FTSPs are not subject to deposit insurance.
  - FTSPs must give a 30-day notice to users when they decide to go out of business.
- Historical and operational notes:
  - Up until recent PSA amendments, all FTSPs had to limit the maximum amount per transaction to JPY 1 million.
  - All existing FTSPs were by default classified as Type II by the amended PSA, while two have already obtained licenses to operate under Type I (both licensees mainly cater to foreign nationals working in Japan and sending remittances abroad).
  - No Type III license has been processed yet.

### Electronic salary payments and FTSP designation
- Further legislative amendments in 2023 enable individuals to receive salary payments via FTSPs.
- Since April 2023, Type II FTSPs can apply to the Ministry of Health, Labor and Welfare (MHLW) to be designated as a provider of electronic salary payments if they satisfy conditions including:
  - Obligation to transfer any amount in excess of JPY 1 million to the employee’s designated bank account.
  - Mechanism to guarantee obligations to workers within six business days in the event of bankruptcy.
  - Designated FTSPs must obtain a guarantee (by a bank or some other financial sector entities) to cover their obligations towards workers.
- To date, no FTSP has been designated as a provider of electronic salary payments, although several have applied to the MHLW.
- The FSA anticipates that any designated FTSP would be placed under enhanced supervision and has updated FTSPs Supervisory Guidelines to reflect higher expectations.

### Prepaid Payment Instruments Issuers (PPIIs)
- PPIIs are regulated by the PSA and issue prepaid cards, often digital (smartphone app), for closed loop or open/semi-open loop use.
- Characteristics and requirements:
  - Topped-up value of PPIs cannot be cashed out; for digital PPIs, topped-up value is only transferable within the issuer’s platform.
  - Third-party issuers are required to maintain net assets of JPY 100 million (no such requirement exists for issuers of self-issued cards).
  - Both types must retain at least half of the funds received from users with the Official Depository, a trust bank/trust company or hold a bank guarantee.
  - Required to have adequate management and IT systems and to disclose that issuers only have an obligation to at all times retain half of the funds received from users.

### Open banking and intermediation reforms
- A revision of the Banking Act in 2018 required Japanese banks to develop systems for open Application Programming Interfaces (APIs); most banks have already done so.
- The Banking Act reform introduced a license for Electronic Payment Service Providers and required banks to disclose policies regarding collaborations with Electronic Payment Service Providers.
- There are a total of 118 licensed Electronic Payment Service Providers; almost all banks have contracts with one or more Electronic Payment Service Provider.
- A reform of the Act on Sales, etc. of Financial Instruments (renamed “Act on the Provision of Financial Services”) in 2021 introduced a license enabling entities to intermediate in multiple financial services under a single license:
  - There are currently 8 Financial Services Intermediaries.
  - Bank agency licenses: out of a total of 77 bank agency licenses, 37 have been granted in the last 3 years.

### Findings and Recommendations on fintech and digital payments
- Observations:
  - The FSA monitors fintech developments through different channels and responds with targeted regulatory initiatives.
  - Institutional arrangements for fintech oversight seem adequate; the FSA actively engages with industry and analyzes reporting data from licensed firms.
- Recommendations:
  - Adopt a more systematic approach to data gathering and analysis of domestic fintech trends; lack of clear definition and taxonomy makes collection challenging.
  - Conduct analysis of the current status of fintech in Japan across sectors supervised by the FSA to provide a baseline for systematic data gathering, forward-looking market monitoring and financial stability analysis.
  - Intensify monitoring and enhance supervision of digital payment services given fast growth.
- Specific suggestions:
  a. PPIIs:
    - Authorities should analyze whether the retention of 50 percent of funds remains adequate given growth and digital availability of prepaid cards (e.g., by gathering data on average outstanding unused balances and prevalence of digital cards, analyzing client distribution across providers, surveying client behavior, etc.).
    - Consider expanding the requirement to cover 100 percent of funds, at least for third-party PPIs.28
  b. FTSPs:
    - Monitor developments closely to determine whether current safeguards remain sufficient.
    - Consider requiring entities to develop wind down plans for FTSP failure.
    - Enhanced supervision of most relevant players will be key.
  c. Use of SuperApps:
    - Monitor development of SuperApps by digital payment service providers and potential implications beyond payments that could be relevant for supervision.
- Coordination and capacity building:
  - The FSA should continue to work with the Local Financial Bureaus (LFBs) to ensure adequate supervision of fintech-related registrants.
  - Ensure supervisory priorities and potential areas of concern are communicated to LFBs and that LFBs are well informed and educated on fintech risks.
  - Continue providing training to LFB staff on fintech matters on a regular basis.

### Regulation and supervision of crypto assets: PSA-derived framework and timeline
- The regulatory framework for crypto assets in Japan stems from the Payment Services Act (PSA).
- Timeline and major reforms:
  - PSA first amended to introduce specific regulation for crypto assets in May 2016; reform entered into force in April 2017.
    - Introduced a category of exchange operators: Crypto Asset Exchange Service Providers (CESP).
    - Introduced disclosure requirements, rules on minimum capital and net assets, external audit of financial statements, asset segregation requirements and system security management requirements.
    - The Act on Prevention of Transfer of Criminal Proceeds enacted concurrently included AML/CFT measures like identity verification at account opening, record keeping and reporting of suspicious transactions.
  - Subsequent reform in 2020 introduced more comprehensive framework and stricter requirements:
    - Requirement for crypto assets to be managed in an offline environment (cold wallet).
    - Requirement to establish a system to prevent conflicts of interest.
    - Included “management” of crypto assets (wallet services) within definition of CESP.
    - Required exchanges to notify authorities prior to adding new crypto assets for trading and introduced market integrity measures (prohibiting manipulation of prices, rumor spreading and other unfair acts) and marketing/solicitation requirements.
  - Third reform enacted in 2022 and entered into force in June 2023:
    - Introduced a regime for stablecoin issuers and exchanges.
    - Enables trust banks/companies and FTSPs to issue stablecoins31,32.
    - Creates a separate license for stablecoin exchanges: Electronic Payment Instruments Exchange Service Providers (EPIESP).
    - Entities with a CESP license that want to trade stablecoins must also apply for a separate EPIESP license.

*Preserved footnote language as in source: "Those stablecoins that are issued at a price linked to the value of the legal currency and that promise redemption at par have been defined as “electronic payment instruments” and can be issued and traded in Japan further to the newly introduced regulatory framework." "Commercial banks are also allowed to issue stablecoins, but only in permissioned platforms and taking the form of tokenized deposits."*

### Box 1 — The Case of FTX (summary of lessons and actions)
- FTX Trading Ltd. collapsed in November 2022; domiciled in the Bahamas with local operations including Japan.
- FTX offered leveraged trading, futures contracts, issued FTT token, and was affiliated with Alameda Research.
- Massive withdrawals in early November 2022 led to suspension of trading and user lock-in; FTX filed for bankruptcy in the US on November 11, 2022.
- FTX had acquired an FSA-licensed CESP earlier in 2022 and provided services to Japanese clients under FTX Japan:
  - FTX Japan kept adequate books and records, segregated clients’ funds in a trust account and crypto assets in cold wallets as required.
  - Local IT systems were dependent on FTX global; trading halted simultaneously for all FTX operations.
  - FTX Japan suspended customers’ withdrawals on November 8, 2023 (US time).
  - On November 10, the Kanto LFB issued administrative orders: suspend business except redemption of clients’ assets; retain assets in Japan; and a business improvement order for identification, preservation of assets and disclosure.
  - On November 14, FTX Japan announced it held excess assets sufficient to pay out all users.
  - Due to IT dependencies, FTX Japan could not resume returning assets until February 21, 2023, despite clarifications regarding non-applicability of automatic stay under US bankruptcy procedures as early as December 1.
  - As of the date of the note, FTX is in the process of steadily returning assets to clients as requested.
- Key takeaways:
  - Japanese regulatory segregation of clients’ assets supported return of clients’ assets and these assets were determined not to be part of FTX’s estate under US bankruptcy procedures, though weeks were needed to clarify and implement asset returns due to IT dependencies.
  - The case highlighted both the safeguards of the Japanese CESP framework and challenges from global operations (IT dependencies and uncertainty regarding bankruptcy remoteness across jurisdictions).
  - The FSA amended its Guidelines to require additional measures for global CESP operations:
    - Entities must ensure adequate IT systems and processes to enable client redemptions irrespective of overseas business operations.
    - Entities must notify clients about potential impacts of foreign regulatory frameworks and the risk of uncertainty of clients’ assets remoteness in the case of foreign insolvency procedures.

*Italicized source attribution line preserved as required below.*

*Source: Excerpt from IMF Technical Note (content unit 1jpnea2024008).*

### 48.   The requirements for CESPs are mainly detailed in the PSA, the Cabinet Office Order on

### 48.   The requirements for CESPs are mainly detailed in the PSA, the Cabinet Office Order on 

### Requirements for CESPs (detailed areas)
- AML/CFT:
  - Requirements for know your customer (KYC) and identity verification at the time of opening an account.
  - Record keeping requirements and measures to identify and report transactions that could be suspicious of being connected to money laundering activities.
- Capital requirements:
  - CESPs must have a minimum capital of JPY 10 million and net assets must not be negative.
  - They must have annually audited financial statements.
- Governance and conflicts of interest:
  - Firms required to have internal rules concerning the services of the CESP and carry out regular monitoring and verification to ensure appropriate business practices in accordance with laws and regulations.
  - CESPs must put in place a system to detect, manage and adequately disclose any conflicts of interest that may arise.
  - CESPs need to formulate and publicly disclose their internal management policy for the management of conflicts of interest.
- Order handling and trade disclosures:
  - CESPs expected to act in the best interest of their users and required to publish policies and methods for executing transactions under the best terms and conditions for each type of crypto asset.
  - Before entering any transactions, CESPs must disclose whether a trade is to be executed in the exchange or whether the CESP will be a counterparty to such trade.
  - CESPs must provide information regarding latest contract and reference price of the crypto asset, and latest sale and purchase price if trading with the user out of its own inventory.
  - CESPs required to provide complete information regarding the CESP, including trade name and address, license details, applicable fees, and relevant contact details for complaints and consultations.
- Record keeping requirements:
  - CESPs required to maintain adequate records of all transactions, including those executed off-chain, for a period of at least 10 years.
  - Specific details to record include transaction dates, users’ identification, transaction types, details of crypto asset, quantities, prices, and fees.
- Listing of assets:
  - Before listing a new crypto asset, CESPs must undergo a screening process carried out by JVCEA.
  - CESPs must provide detailed explanations on structure, assumed uses, distribution, technology, and risks (including AML/CFT and IT system risks).
  - JVCEA reviews whether the asset can be listed from the viewpoint of protecting users and ensuring proper conduct of business.
  - JVCEA maintains a “green list” of crypto assets already more widely distributed in Japan (listed in at least 3 CESPs), which CESPs can list without the full listing process.
- Market integrity:
  - Framework prohibits market abuse conducts, including spreading of rumors, manipulation of prices, use of inside information.
  - CESPs required to have systems and processes to carry out adequate surveillance to identify suspicious transactions.
- Custody of funds and crypto assets:
  - CESPs must keep users’ funds and crypto assets separate from those of the CESP and must undergo external audits of the status of this segregation requirement by a certified audit accountant, at least annually.
  - CESPs must manage users’ crypto assets in an offline environment (cold-wallet).
  - Less than 5 percent of the crypto assets can be handled in a hot wallet; if so, the CESP should separately hold the same type and same value of its own crypto assets in a cold wallet.
  - If a CESP can borrow crypto assets from its users, it must clearly indicate that such borrowing does not fall within the scope of custody services and establish a system for appropriately managing outstanding obligations to avoid excessive obligations and repayment difficulties.
- Use of leverage:
  - CESPs can carry out margin lending services under limited conditions.
  - Individual investors are only allowed to borrow up to twice their initial investment for trading crypto assets.
  - The leverage ratio for corporates is set weekly by the JVCEA and varies by crypto asset; the historical high has been around 10 times a user’s initial investment.
  - To offer OTC derivatives over crypto assets, CESPs must obtain a separate license under the Financial Instruments and Exchange Act (FIEA) as a Type I Financial Instruments Business Operator (Type I FIBO, or securities intermediary).
- IT and operational risk:
  - CESPs must ensure sufficient control of the electronic data processing system handling the crypto asset exchange services and prevent leaking, loss, or damage of information.
- Marketing activities:
  - When advertising services, CESPs must provide clear and adequate information that crypto assets do not constitute legal tender, the risk of losses from value fluctuations, and that crypto assets can only be used as payment with the consent of the receiving party.
  - Framework prohibits CESPs from making unsolicited contact with clients and other abusive marketing initiatives.

### Key Additional Elements of the Stablecoin Framework
- Issuance and licensing:
  - No separate license required to issue stablecoins, but the issuer must already be licensed as a trust bank/company or a Fund Transfer Service Provider.
  - Issuance governed by specific requirements of each license (e.g., Type II FTSPs bound by the limit of JPY 1 million per transaction).
- Reserve and custody requirements:
  - For trust bank/company issued stablecoins, underlying reserve assets to be held under a trust agreement with entrusted assets held by means of bank demand deposits.
  - For FTSP-issued stablecoins, reserve assets must be either deposited with the Official Depository, covered by a bank guarantee or a trust agreement; entrusted assets must be cash, bank deposits and/or highly liquid assets such as government and municipal bonds.
  - All issuers required to have structure and processes to respond to redemption demands directly from users.
  - Issuers must provide users with information about the functioning of the stablecoin, which can be fulfilled by the exchange where the stablecoin is listed.
- EPIESPs (exchange or wallet services for stablecoins):
  - Framework for EPIESPs is similar to that of CESPs.
  - Entities wishing to carry out exchange or wallet services for stablecoins need an EPIESP license from the FSA and must comply with similar requirements regarding AML/CFT, capital, asset segregation, record keeping, governance, disclosure, leverage, system security management and advertisement.
  - Screening process for listing new stablecoins similar to that for unbacked crypto assets; exchanges provide necessary information for the relevant SRO to verify.
  - Due to novelty of the regime, the FSA anticipates being more involved in the screening process until the SRO gathers sufficient expertise.
- Foreign stablecoin issuers:
  - Foreign issuers can request trading of their stablecoins in Japan if their regulatory framework is similar.
  - The issuer must demonstrate it is subject to a regulatory regime similar to the Japanese; the FSA will check ability to redeem at par at users’ requests and how the stability mechanism works.
  - The EPIESP listing a relevant foreign stablecoin in Japan must set aside sufficient cash to be able to return funds to clients in the event of insolvency of the foreign issuer.
  - No foreign stablecoin is yet available for trading in Japan.
  - No SRO has been certified by the FSA yet, regarding stablecoins.

### Registration
- CESP Monitoring Office responsibilities and licensing data:
  - The CESP Monitoring Office is in charge of registration of CESPs.
  - Since the framework was introduced in 2017, a total of 34 licenses have been granted and there are currently 29 licensed CESPs in operation.
  - A team of approximately 6 staff is involved in the registration process, consisting of at least three staff from the CESP Monitoring Office plus a legal expert, an AML/CFT expert and an IT expert from the Fintech Policy Office.
  - The registration process takes on average over one year.
- Registration process steps:
  - Documentation review, interviews with management and an onsite visit.
  - Applicants complete and submit a questionnaire to the FSA on compliance with regulatory requirements.
  - FSA carries out interviews with directors to understand business plans and systems.
  - Review of submitted documentation evidencing frameworks and compliance (e.g., segregation contracts).
  - Onsite visit with further interviews and verification of effectiveness of internal regulations and management systems.
- EPIESP applications:
  - No formal application submitted under the new framework for EPIESPs but a similar screening process will be followed.
  - Several entities have contacted the FSA regarding stablecoin projects from an issuer perspective, and some CESPs have notified the FSA of intent to apply for EPIESP registration.
  - Entities will fill a screening questionnaire and undergo similar verification as for the CESP license.
  - Official applications for EPIESP licenses are expected later this year; the FSA is expected to approve projects by issuers before they can list their stablecoins.

### Supervision and enforcement
- Supervisory allocation and scope:
  - CESPs are subject to supervision by the FSA and Local Finance Bureaus (LFBs).
  - The CESP Monitoring Office of the FSA formulates offsite monitoring policies: the most significant entities are designated for supervision by the FSA, while less significant ones are dealt with by the LFBs.
  - Out of the 29 currently registered CESPs, about one-third are under the direct supervision of the FSA while the rest are primarily supervised by the LFB.
  - Onsite inspections of all CESPs are mainly conducted by the LFBs, with FSA staff commonly joining for IT systems and AML/CFT matters.
- Offsite monitoring and reporting:
  - CESPs report transaction data to JVCEA on a monthly basis, including trading volume for spot and margin transactions, user deposit and margin balances; JVCEA aggregates and submits this to the FSA monthly.
  - CESPs draft an annual Regulatory Business Report with detailed proprietary trading volume and value by type, trading volume and value on users’ accounts, value of own assets and users’ assets, number of outsourced operations, and annual information on business offices, employees, sales, costs, operating income, borrowing etc.
  - Quarterly reports on the status of segregated management of users’ funds and crypto assets are submitted.
  - The CESP Monitoring Office reviews reported information and carries out interviews or hearings when needed; analysis of reporting, interviews and onsite inspections informs risk identification and supervisory priorities.
- Onsite inspections and follow-up:
  - LFBs and FSA carry out onsite inspections; firms chosen based on significance, complexity, governance concerns, previous issues, etc.
  - Each onsite visit completed by a notification and an inspection report listing issues for improvement; CESPs expected to follow up by submitting periodic reports; hearings conducted when required.
- Supervisory guidance and priorities:
  - The FSA has detailed Guideline for Supervision of CESPs—a manual providing support and direction for supervisors; Guidelines updated as needed and published on the FSA’s website.
  - The FSA decides an annual plan to monitor CESPs and publishes main points in the “JFSA Strategic Priorities”.
  - In the Program Year 2023 (July 2023-June 2024) the FSA focuses on better understanding business models of CESPs, appropriateness of business management and internal control systems, including AML/CFT and cybersecurity; the FSA will work with JVCEA to improve screening of new crypto assets and provide strong response to unregistered CESPs.
- Administrative measures and SRO disciplinary powers:
  - In case of infringement, the FSA can impose administrative measures: business improvement orders, business suspension orders or registration revocation orders.
  - The FSA cannot impose monetary penalties.
  - The FSA has imposed approximately 30 administrative measures since 2017, most in the form of business improvement orders.
  - The JVCEA can take disciplinary actions against members for breaches of laws, regulations, or SRO rules: reprimands, imposition of fines, suspension or limitation of SRO member rights or expulsion.
  - JVCEA fines can be up to JPY 100 million, and if the violation is significant, up to JPY 500 million; if unjust enrichment can be reasonably calculated, such amount can be added to the limit (JPY 100 million or JPY 500 million).
  - Both FSA administrative orders and JVCEA disciplinary actions are published on their respective websites (the JVCEA has not taken any disciplinary actions yet).
- Horizon scanning and warnings:
  - The FSA carries out horizon scanning of non-licensed entities and issues warnings for those providing services to Japanese clients.
  - The FSA regularly screens social media, consumer complaints and other sources to monitor crypto trading platforms not licensed in Japan but soliciting Japanese customers, and publishes alerts notifying the public of lack of license.
  - In the last five years, it has issued three warnings regarding domestic non-registered CESPs and 13 regarding foreign non-registered CESPs.
  - The FSA collaborates with law enforcement and the Consumer Affairs Agency to raise awareness regarding unregistered exchanges and crypto fraud.
  - It does not currently have any other investor education initiative to educate the general public on the risks of crypto assets and safeguards provided by the regulatory framework.

### Findings and Recommendations
- Findings:
  - Japan has developed a comprehensive conduct and prudential regulatory framework for CESPs that incorporates key user protection, prudential and conduct of business requirements, providing safeguards especially via strict asset segregation and compulsory use of cold wallets.
  - The framework provides detailed screening at licensing and listing, and offsite and onsite supervision of licensed firms.
  - The FSA devotes sufficient time and resources to CESP licensing and supervision, and screening of new crypto assets in collaboration with JVCEA and LFBs.
- Recommendations:
  - Consider incorporating a securities secondary markets expert into the CESP Monitoring Office team to broaden staff background.
  - The FSA should work with industry and stakeholders to fine tune the regulatory framework, particularly tailoring measures to prevent market abuse and improving market surveillance approaches of CESPs to address crypto asset market specificities.
  - Broaden investor education efforts beyond warnings on non-licensed firms and alerts on unregistered CESPs; consider a broader approach to customer education on overall crypto asset risks and safeguards of the regulatory framework to reduce user access to the unregulated market.
  - Review the strength of authorities’ enforcement approach to better deter unregistered providers; consider whether giving the FSA the ability to impose monetary penalties could assist in preventing unlicensed CESPs serving Japanese clients, noting this may be more deterring for foreign firms.
  - Ensure that the SRO’s enforcement program is sufficiently strong, with capacity and willingness to use enforcement powers, including imposing penalties when warranted.

*Source: IMF content unit 1jpnea2024008 - 48.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1jpnea2024008.pdf_