Sangiin Member Tsutomu Okubo Questions on Bitcoin

The MtGox insolvency has been big news in Japan. As a result, Japanese politicians are starting to discuss Bitcoin regulation.

Member of Parliament in the House of Councillors (sangiin, 参議院) Tsutomu Okubo has repeatedly asked the government about Bitcoin. His first set of questions was released on February 25, 2014. I will translate these questions here in full.

I just discussed Bitcoin regulation with him directly today, and he kindly gave his permission for me to post this English translation here.

The government answered these questions on March 7. I will provide a full translation of these answers as well. Obviously it makes sense to arrange each answer after each question.

Here we go.

 

(Okubo) “The virtual Internet currency Bitcoin is getting some attention. There are many sites on the Internet that accept bitcoins for the payment of goods or services. An increasing number of brick and mortar merchants are also accepting bitcoins. However, the legal status of Bitcoin is uncertain, which introduces an element of uncertainty to payments.

“Therefore, I have the following questions, with a view to clarify the regulation applying to Bitcoin, and assuring safety and certainty of trades.

“Question one: How many bitcoins are in circulation worldwide now, and what is their value in Japanese yen?”

“Question two: I understand that the role of Bitcoin for payments and the legal status of Bitcoin is different in various foreign countries. For example, there have been reports that the use of bitcoins in has been regulated in China and Russia.

“Are there foreign countries that have adopted a position on the legal status of Bitcoin, or are expected to adopt such a position in the near future?”

(Government) “Answer to questions one and two: We understand that there is no specific institution that issues bitcoins. It also lacks the backing of any government or central bank for its credit. The government still does not grasp the big picture of Bitcoin. We are in the process of gathering information, while aiming for an approach coordinated between Ministries involved.

“It is difficult to state anything with certainty on the question of how many bitcoins are issued right now and what their economic value is. We also don’t know if there are any foreign countries who have adopted a legal position on the status of Bitcoin or are in the process of doing so.”

(Comment by me): This shows a surprising level of ignorance. The number of bitcoins issued and the market cap at any given moment is easily checked. At the moment I am writing these lines, coinmarketcap.com shows 12,507,525 bitcoins issued and a market capitalization of $7,947,906,761. It takes a couple of moments with a search engine to find this information. The Japanese government could also have easily found the position of the German regulator BaFin issued in 2011, which sees bitcoins as “financial instruments”, by taking a look at my 2013 paper on legal issues of Bitcoin (the first such paper in Japanese language).

This ignorance will be rectified shortly. But it means that this first government answer can hardly be regarded as being founded on a correct grasp of the situation, as the government is pointing out themselves as well.

(Okubo) ”Question three: Are bitcoins “currency” in Japan under the Civil Code or are they “currency” or “foreign currency” under the Foreign Exchange and Foreign Trade Act? Are there any other laws beside these two that include bitcoins under the term “currency”?

“Also, how is Bitcoin dealt with in the Banking Act, the Financial Instruments and Exchange Act and other laws relating to finance? What is the legal status of Bitcoin in other laws?

(Government) “In Japan, the term currency is regulated for coins in Article 7 of the Act on Currency Units and Issuing of Coins (Act No. 42 of 1987), which allows for issuing up to twenty times of the face value, and for banknotes in Article 46 Paragraph 2 of the Act on the Bank of Japan, which allows for unlimited issuing. These coins and banknotes are recognized as legal tender. In contrast, bitcoins are not currency.

“Currency under Article 402 Paragraph 1 and 2 of the Civil Code are coins and banknotes which have force as legal tender. Since bitcoins have no force as legal tender, they are not currency under these Paragraphs.

“There is also no other law that would include bitcoins in the definition of currency.

“Also, bitcoins are not currency, and they do not as such certify any rights. Therefore, as far as trade in bitcoins as such is concerned, this is not “banking” under Article 2 Paragraph 2 of the Banking Act (Act No. 59 of 1981) or dealing in financial instruments under Article 2 Paragraph 1 and 2 of the Financial Instruments and Exchange Act (Act No. 25 of 1948).

“We are not aware of any other law that defines the legal status of Bitcoin clearly.”

(Comment from me): The German regulator disagrees with the idea that trades in bitcoins are free of any oversight. They say that bitcoins are “financial instruments”. And it is true that selling one bitcoin for 65,000 yen in a face-to-face deal in Shibuya is not “banking” under the Banking Act. That does not mean, however, that the MtGox exchange was not in the “banking” business. As I explained in detail here, they certainly were in the banking business the moment they took deposits in traditional currency. Which triggered the requirement for a bank license under Article 4 of the Act.

(Okubo) “Question four: If, as a result of the answer to question three above, there is no law in Japan that would include bitcoins in the definition of currency, is it forbidden in Japan to use bitcoins as a means of payment? If there is such a prohibition, what law exactly would be the basis for that? If there is no such prohibition, I would like to ask about the following three points (including legal basis):

“1. Are trades based on bitcoins taxed?

“2. Is a bank allowed to broker sales of bitcoins, exchange bitcoins for Japanese yen, or offer accounts denominated in bitcoins, or use bitcoins as a means of money transmission?

“3. Can securities firms of firms offering investment advice set up a fund that has bitcoins as his investment target?”

(Government): “As far as we know, there is no law prohibiting the use of bitcoins as a means of payment.

“As question 1 is concerned, it is necessary to decide on taxation by looking at individual cases. It is also not clear what the “trades based on bitcoins” in the question exactly are. Therefore it is difficult to provide a general answer.

“As a general rule, if such a trade fulfills the conditions set in the Income Tax Act (Act No. 33 of 1965), the Corporate Tax Act (Act No. 34 of 1965), or the Consumption Tax Act (Act No. 108 of 1988), then it is taxable.

“On question 2, the business of brokering the sale of bitcoins, of exchanging bitcoins for yen, of offering an account denominated in bitcoin, and of transferring money from one such account holder to another one, these are all not listed in the businesses allowed to banks under Article 10 Paragraph 1, all Numbers, or Paragraph 2, all Numbers, or Article 11, all Numbers of the Banking Act.

“On question 3, leaving open the question if bitcoins are a suitable target of investing, Article 35 Paragraph 2 Number 6 of the Financial Instruments and Exchange Act and Article 68 Number 19 of the Cabinet Order based on Number 7 of that Paragraph (Cabinet Order No. 52 of 2007) allow securities firms of the first class and securities firms who perform investment services to engage in brokering securities or derivatives, and as rights different from these are concerned as investment of assets, to engage in managing assets.”

(Comment from me): Short answer to question three seems to be yes. Barry Silbert of SecondMarket already has set up a “Bitcoin Investment Trust” in the United States, which is open for business since last fall and up by over 390% since inception at the time I am writing this. I think it would be a very good idea to set up some kind of fund that allows holders of NISA accounts to invest in bitcoins.

NISA accounts are investment accounts where the investor does not need to pay capital gains tax for any investment of up to one million yen a year. The “N” part is stands for “Nippon”, or Japan. The “ISA” part means “individual savings account”. Legislation introducing these accounts came into effect in January 2014. But holders of such accounts are not able to invest in the asset class that beat everything else by a large margin last year.

(Okubo) “Question five: If bitcoins are actually used in Japan for payment purposes, it becomes necessary to stop such use for money laundering purposes, and to prosecute quickly any such use. In the view of the government, which laws make sure of that? I would like to especially about the Act on Punishment of Organized Crimes and Control of Crime Proceeds and the Act on Prevention of Transfer of Criminal Proceeds in that regard.

“Also, if as an answer to question three there is no law that includes bitcoins in its definition of currency, especially if it is not included in the definitions of the Civil Code, the Banking Act, and the Act on Foreign Exchange and Foreign Trade, I think this may be a problem with money laundering policies, and would like to hear the opinion of the government on that point.”

(Government) “Establishing the facts of a crime is a decision to be taken by law enforcement based on the evidence collected in individual cases. The question of using bitcoins for money laundering purposes will be decided by applying Article 10 Paragraph of the Act on Punishment of Organized Crimes and Control of Crime Proceeds (Act No. 136 of 1999). If such an act of using bitcoins falls under “falsifying or concealing the acquisition or disposal” of “proceeds from crime”, then a crime under that Article would be committed. Also, the Act on Prevention of Transfer of Criminal Proceeds (Act No. 22 of 2007) requires specified business operators under Article 2 Paragraph 2 of that act to follow “Know-Your-Costumer” rules for certain trades, regardless if bitcoins are used or not.

“As already mentioned in our answer to question 3 above, there is no law that would include bitcoins in its definition of currency. The question if this fact will be a problem for money laundering policies is difficult to answer at this stage, since the real circumstances of bitcoins use are not clear at the moment.”

(Okubo) “Question six: Exchanges for trading bitcoins against Japanese yen, American dollars or other foreign currencies exist also in Japan. Is the establishment of such an exchange or are the trades conducted there void under the Civil Code? Are these compatible with the Banking Act, the Financial Instruments and Exchange Act, the Act on Foreign Exchange and Foreign Trade, and other laws? I would like to ask especially about the crimes of gambling and selling lottery tickets under the Criminal Code.”

(Government) “There is no law generally prohibiting the establishment of exchanges for trading bitcoins against Japanese yen, American dollars or other foreign currencies, or the trades conducted there. The question if these are void under the Civil Code or in violation of other laws needs to be decided on a case by case basis. It is not possible to give a general answer.”

(Okubo) “Question seven: Offering trading between bitcoins and Japanese yen, American dollars or other foreign currencies may be offering a fake investment or a pyramid scheme. Is there any criminal penalty for that? Also, what kind of registration or compliance with offering regulations under the Financial Instruments and Exchange Act and other laws regulating finance are necessary for opening an exchange?”

(Government) “There is no law that generally provides a criminal sanction for opening a bitcoin exchange. Therefore it is to be decided on a case-by-case basis if such an offering violates criminal law. Also, as explained already in the answer to question three, trades in bitcoins do not qualify as trades in securities etc., so there is no need for registering or compliance with offering regulation for this kind of trade.”

(Comment from me): Operating an exchange like MtGox certainly requires a bank license. That has nothing to do with Bitcoin. They were taking deposits in traditional money. That triggers a license requirement under Article 3 of the Banking Act. Therefore, this answer seems to be lacking somewhat. If bitcoin exchanges are completely unregulated, that’s a recipe for the next disaster like the MtGox mess to happen.

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

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