Second Round of Questions from Member of House of Councillors Okubo

Member of the House of Councillors Tsutomu Okubo has asked a second set of questions relating to Bitcoin, and the government has answered these questions. See here for my translation of the first set.

Below, I provide a full translation of all questions and all answers, with only a couple of comments from me. My general impression is that the government does not provide much insight. Most of the questions are answered with a slightly more polite version of “no comment”.

I think it is a good thing that the Japanese government takes the time to study the issue in detail, before committing themselves to any course of action. Eventually, some regulation or other will be enacted. It should be enough to make sure a mess like MtGox doesn’t happen again, but not so burdensome as to impede the development of the sector in the Japanese market.

Here we go:

 

(Okubo) “Since I had some doubts about the government’s answers to my last set of questions about Bitcoin, I add the questions below:

Question one: In answer to my question, the Bank of Japan delivered a report. According to that report, there are about 12 million bitcoins issued. At the rate of February 27 of this year (one bitcoin was at $621), that would be the equivalent of about $7.7 billion. Looking at these numbers, one can say that bitcoins are on their way to being recognized as a method of payment and investment.

“Considering these facts, what is the government’s position on the opinion that bitcoin provides its users with a method of measuring value, storing value, and exchanging value?”

(Government) “The government does not yet understand the big picture regarding Bitcoin. We are in the process of gathering information, coordinating the efforts of relevant Ministries. There are many different informations about the amount of bitcoins issued, and their price. Therefore, as we answered the last time, it is difficult to make a definite statement about the amount of bitcoins issued and their market capitalization. Therefore, it is difficult to state a position about the opinion mentioned in the question.”

(Comment by me): It is hard to believabe that the government would not know such basic facts. If they still have not been able to figure this out, the “coordinated effort to gather information” does not seem to progress very well.

Even if you don’t know how many bitcoins there are, you could still discuss the question if the Bitcoin network functions as money that was raised in the question.

 

(Okubo) “Question two: In the answer to my previous questions one and two the government states: ‘We are in the process of gathering information, while aiming for an approach coordinated between Ministries involved.’ But, considering the bitcoin market capitalization of $7.7, the petition for civil rehabilitation filed by the MtGox stock company, and other recent developments, I think that it would be desirable to speed up the information gathering and provide for the necessary regulation quickly.

“When does the government intend to legislate in this area? Especially, I would like to ask for clarification if it is possible to get this done in the current legislative period.”

(Government) “Regarding to Bitcoin, the government is now in the process of gathering information in an effort coordinated between relevant Ministries. Once we understand the big picture, we will proceed to thinking about necessary policies. Therefore, we can not give any certain answer on the question if we plan to legislate, and if so, when that will happen.”

(Comment by me): The bright side is that the government has not committed to any position right now. That means interested parties can still contribute to the discussion. Having no position is much preferable to knee-jerk reacting with legislation not thought through.

 

(Okubo) “Question three: In the last answer to my previous question three, the terms “legal tender” and “force as legal tender” are used.

“1. How does the government understand the terms “legal tender” and “force as legal tender”? If these terms are based on laws, what are these laws, and where are the definitions for these terms?

“2. Which is the subject that assures “legal tender” or “force as legal tender”? Especially, I would like this point explained for foreign currency traded in Japan.

“3. In Japan, American dollars, renminbi, Indian rupees and other foreign currencies are not recognized with force as legal tender. Considering that, one may think that bitcoins have the same quality as these foreign currencies. What does the government think about this point? If the government disagrees, please state the reasons for that.”

(Government) “1. The term “force as legal tender” as used in our last answer means that if the debtor of a claim of money uses the medium in question to fulfill his obligation, the creditor cannot refuse this as performance, and the performance becomes valid as a matter of course. For coins this force as legal tender is ordered by 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.

“2. The “force as legal tender” is guaranteed by the sovereign State, or by an equivalent entity. Foreign currency is currency for which a foreign country recognizes force as legal tender. Foreign currency does not have force as legal tender in Japan.

“3. As stated above, foreign currency has force of legal tender in a foreign country. Since there is no state recognizing bitcoins as legal tender, it is difficult to understand bitcoins as an equivalent to foreign currency.”

(Comment by me): This answer shows that the government is right when asserting they don’t understand Bitcoin yet. I will discuss this question in detail elsewhere. But, in short, when talking about the situation in Japan, both bitcoins and American dollars lack force as legal tender. And the freedom of contracts allows parties to recognize the force as legal tender for a specific contract both for dollars and bitcoins.

 

(Okubo) “Question four: In the answer to my previous question 4-2, the government states that brokering the sale of bitcoins, offering an account denominated in bitcoins, or providing payment services with bitcoins are not businesses allowed to banks.

“Can banks buy bitcoins for themselves? Can they set up an investment trust? Can they set up derivative investment schemes based on bitcoins? Please explain if these business activities are allowed under the law, and the Articles this is based on, or the conditions that apply.”

(Government) “The act of buying bitcoins in the question is not a business listed as a bank business activity in Article 10 Paragraph 1 all numbers, Paragraph 2 all numbers, or Article 11 all numbers.

“It is correct that a bank can engage in the business activity of buying and selling securities (Article 10 Paragraph 2 Number 2), the business activity of trading in security and financial derivatives (Paragraph 2 Numbers 2, 12, and 14). However, since it is not entirely clear what is meant by “bitcoin investment trusts” or “investment schemes based on bitcoins” in the question, it is difficult to give a general answer.

“On the other hand, as long as “buying bitcoins” does not reach the level of a business activity, while it may be open to debate if that would be appropriate, this would be dealt with like a bank buying other assets not directly related to their business activities. There is no provision in the Banking Act that would clearly prohibit such an act.

 

(Okubo) “Question five: Is the business of offering put options on bitcoins, for example the derivative right to buy one bitcoin at $500, a business listed in the relevant laws for institutions taking deposits, enabling these institutions to offer such derivaties? For example, with banks that would be the Articles 10 and 11 of the Banking Act, and for securities brokers it would be Article 35 of the Financial Instruments and Exchange Act. If this is possible, I would also like to ask if these are legally classified as specific business or incidental business.

Another business would be offering a saving plan or a financial instrument the value of which changes with the price of bitcoins. I would like to know if financial deposit institutions or securities brokers can set up, issue, or broker such investments.”

(Government) “Under Article 10 Paragraph 2 Number 2, Number 12, and Number 14 of the Banking Act, a bank may engage as a business activity intrinsic to banking in trading in securities or financial derivatives. Under Article 35 Paragraph 4 of the Financial Instruments and Exchange Act a securities broker may engage in business activities, beside those of brokering and those regulated in Paragraph 1 and 2 of that Article, for which they have received a special permit from the Prime Minister. However, since it is not clear what exactly the meaning of an “option on bitcoins, for example the derivative right to buy one bitcoin at $500” is supposed to mean, it is difficult to give a general answer if this would fall under these rules.

“Also, Article 13-4 of the Banking Act allows banks to accept deposits set up in a way that are linked to market indexes or other indexes. Article 2 Paragraph 8 Number 1 and 2 of the Financial Instruments and Exchange Act allow securities brokers to engage in the business of selling and buying financial instruments, brokering such sales, and acting as intermediary for them. However, since it is not clear what exactly “offering a saving plan or financial instrument the value of which changes with the price of bitcoins” is supposed to mean, it is difficult to give a general answer if this would fall under these rules.”

 

(Okubo) “Question six: Since the government thinks that bitcoins are no currency, I would like to know the government’s position on if it is not illegal for someone to take deposits of bitcoins from a multitude of unspecified customers, guaranteeing the capital, or lend those bitcoins in a continuing basis, under the Act Regulating the Receipt of Contributions, the Receipt of Deposits, and Interest Rates. If the government thinks taking such deposits is illegal, I would like to know the detailed interpretation such an opinion is based on.

“Also, if someone lends 100 bitcoins at an interest of 30 bitcoins a year, receiving 130 bitcoins back, would in the government’s opinion such a contract using bitcoins be possible even if the interest is above the interest rates allowed by the Interest Rate Restriction Act and the Act Regulating the Receipt of Contributions, the Receipt of Deposits, and Interest Rates?”

(Government) ”It is not clear what exactly “to take deposits of bitcoins from a multitude of unspecified customers, guaranteeing the capital, or lend these bitcoins on a continuing basis” is supposed to mean. Also, establishing the facts of a crime is a decision to be taken by law enforcement based on the evidence collected in individual cases. Therefore, we can only make some general statements. As the Act of Regulating the Receipt of Contributions, the Receipt of Deposits, and Interest Rates (Act No. 95 of 1954) is concerned, if the criminal sanctions rules in that Act are violated, it would be illegal under that Act. As to the question which laws might be violated in that case, that would be a matter decided looking at the circumstances of the concrete case at hand. Furthermore, regarding the question of application of Article 1 of the Interest Rate Restriction Act (Act No. 100 of 1954): This rule makes void contracts about lending money as far as the interest rate stated in each Number of that Article is surpassed. The question if this rule would be applicable to lending of bitcoins is difficult to answer, since it is not clear how bitcoins are used.”

 

(Okubo) “Question seven: The MtGox stock company was the World’s largest exchange before it filed a petition for opening a civil rehabilitation procedure. On the other hand, there is a report by the American Congressional Research Service which states that bitcoins may be used for money laundering purposes. There is also a case in which one of the board members of an institution promoting Bitcoin was arrested. (Note by me: This refers to the arrest of former Bitcoin Foundation board member Charlie Shrem).

“Under these circumstances one could think that financial institutions offering accounts to MtGox and other bitcoin exchanges in Japan would have a obligation to enhanced due diligence. What does the government think of such an opinion? If there is such an obligation, I would also like to know the extent of such an obligation.

“Also, if someone wires large sums of money into the account of a bitcoin exchange that is offered by a bank for the purpose of buying bitcoins, has the bank in question a duty to make sure of the identity of the person wiring the money, make sure if there are bitcoins bought with that money or not, and hold on to documents about the identity of the person wiring the money? I would also like to know if the government has plans to introduce any such enhanced due diligence obligations.”

(Government) “It is not clear what exactly “enhanced due diligence regarding money laundering” is supposed to mean. For example, Article 8 Paragraph 1 of the Act on Prevention of Transfer of Criminal Proceeds (Act No. 22 of 2007) (Criminal Proceeds Act) requires financial institutions that accept deposits or savings to report to the authorities specified in Article 21 of the Crime Proceeds Act in certain cases. If assets they receive in their business are suspect of being proceeds of a crime, or if the customer is suspect of having violated the Act on Organized Crimes and Control of Crime Proceeds (Act No. 94 of 1991), then they need to report. It does not matter for that if the customer in question is a “bitcoin exchange” or not.

“Also, under the Crime Proceeds Act, if there is a wire transfer to some account, financial institutions are under no obligation to make sure of the identity of the person wiring the money, or the purpose of the wire transfer, or to hold on to records of the transaction. It does not matter for that if the account in question is that of a “bitcoin exchange” or not. Also, a bank that receives a request for a wire transfer needs to make sure of the identity of the person wiring the money, the purpose of the wire transfer, and needs to hold on to records of the transaction, if the wire transfer is done by deposition more than 100,000 yen, or in other cases prescribed by the Criminal Proceeds Act.”

 

(Okubo) “Question eight: If someone runs a bitcoin exchange in Japan, are they obliged to register in some way, or report in some way, in the opinion of the government? I would also like to know the relevant law regulating bitcoin exchanges, and the Ministry in charge.”

(Government) “It is not exactly clear what business model the “bitcoin exchange” in the question is supposed to take. But as far as the business activity of exchanging bitcoins and currency, there is no rule in Japanese law that would require such an exchange to register or report to the relevant Ministry, and there is no “Ministry in charge”.

 

(Okubo) “Question nine: If someone runs a bitcoin exchange in Japan, do they have any obligations regarding anti-money laundering measures, like recording facts, or report the value of bitcoin trades or withdrawals to the relevant Ministry, in the opinion of the government?”

(Government) “As we said in our last answer to question three, there is no law in Japan that clearly regulates Bitcoin. Also, since it the concrete circumstances of the “bitcoin exchange” in the question are not exactly clear, it is difficult to give a general answer.

(Okubo) “Question ten: In the answer to my last question three the government says that bitcoins are not currency or a foreign currency. Does the government think bitcoins are tangible things like gold or antiques, or does it think they are electronic records?

“Also, if the government thinks bitcoins are electromagnetic records, is an act of illegal access to a computer and changing the records on bitcoins an act of computer fraud?”

(Government) “It is not clear what exactly “tangible things” in the question are supposed to mean. Anyway, since the use of Bitcoin is not clear at the moment, it is difficult to answer if bitcoins are “tangible things” or electromagnetic records.

“Establishing the facts of a crime is a decision to be taken by law enforcement based on the evidence collected in individual cases. However, as a general rule, if a person obtains or causes another to obtain a profit by creating a false electromagnetic record relating to acquisition, loss or alteration of property rights by inputting false data or giving unauthorized commands to a computer utilized for the business of another, or by putting a false electromagnetic record relating to acquisition, loss, or alteration of property rights into use for the administration of the matters of another, then such an act would qualify as computer fraud.”

 

(Okubo) “Question eleven: If a Japanese company exports luxury goods like watches, perfume, or caviar via a third country to North Korea, receives payment in bitcoins and exchanges these bitcoins on an exchange into yen, is such a business without problems under existing laws? If there is a problem, what statutes would apply and which Ministry would be responsible?

“Also, if someone living in Japan transfers one hundred million yen worth of bitcoins to someone in North Korea, is such an act without problems under existing laws? If there is some kind of reporting obligation, or an obligation to receive a permit, I would like to know the reason and the applicable law.”

(Government) According to Article 10 and 48, Paragraph 3 of the Foreign Trade and Foreign Exchange Act (Act No. 228 of 1949) (below “Foreign Exchange Act”), if the final destination of freight is North Korea, it is necessary for such export to obtain the permission of the Economy Minister, even if the trade is done via a third country. Since such a permission will not be given except for humanitarian reasons, export of luxury goods is in violation of the Foreign Exchange Act. The fact of payment in bitcoins does not change that either way.

“As for the question if somebody transfers bitcoins worth 100,000,000 yen from Japan to North Korea, that would require a report under Article 55 of the Foreign Exchange Act if that was a “payment” under that Article.

“However, if that payment was done for an import that has either North Korea as country of origin or was loaded into a ship in North Korea, and that import has not received a permit under Article 52 of the Foreign Exchange Act, it is prohibited under Article 16 Paragraph 5 of the Foreign Exchange Act, and in violation of that Act.

“Also, if that payment is to a person specified as connected with the North Korean missile or weapons of mass destruction program, or if it is done with the purpose of contributing to North Korea’s nuclear weapons, missiles, or other weapons of mass destruction programs, such a payment needs permission by the Ministry in charge under Article 60 of the Foreign Exchange Act.”

 

(Okubo) “Question twelve: In answer to my last question four, the government said that as a general principle, Bitcoin could be an object of taxation under the Income Tax Act and the Corporate Tax Act.

“1. If someone who has gained an economic advantage from trading in bitcoins declares his income, what is the correct category of such income, as a general rule? Is it capital gains? I would also like to receive an explanation on how to deal with these issues as a matter of corporate tax.”

(Government) “It is necessary to decide case by case on individual taxation issues. Also, it is not exactly clear what “gained an economic advantage from trading in bitcoins” means. Therefore it is difficult to give a general answer. As a general rule, economic advantages gained by an individual are capital gains if they meet the conditions of Article 33 of the Income Tax Act (Act No. 33 of 1965). For economic advantages gained by a legal person, that economic advantage would be included in the calculation of income of that legal person for the business year involved.”

 

“2. If someone not living in Japan or a foreign corporation gained such an advantage from trading on an exchange in Japan, is it correct to assume that as a general rule such gains would be taxable, in the opinion of the government?”

(Government) “It is necessary to decide case by case on individual taxation issues. Also, it is not exactly clear what “gained an economic advantage from trading in bitcoins at an exchange based in Japan” means. Therefore it is difficult to give a general answer. As a general rule, non-residents of Japan under Article 2 Paragraph 1 Number 5 or foreign legal persons under Article 2 Number 4 of the Corporate Tax Act (Act No. 34 of 1965) are taxable in Japan for income in Japan, as defined under Article 7 Paragraph 1 Number 3 and Number 5 of the Income Tax Act and Article 9 Paragraph 1 of the Corporate Tax Act. If some income does not qualify as “income in Japan” under these Articles, it is not subject to Japanese taxation.”

 

(Okubo) “Question thirteen: If someone has gained an economic advantage from trading in bitcoins, would he need to report in his form declaring the amount of assets and obligations? Also, is that something he would need to report under the system on reporting assets outside of Japan, in the opinion of the government? If bitcoins need to be included in these reports, I would also like to know under which category bitcoins fall, in the opinion of the government.

(Government) “It is not clear what “economic advantage gained from trading in bitcoins” is supposed to mean. Therefore it is difficult to give a general answer. As a general rule, the form declaring assets required by Article 232 Paragraph 1 of the Income Tax Act needs to be filled out according to the rules specified in Table 10 of the Ordinance on the Income Tax Act (Finance Ministry Ordinance 11 of 1965). And the report required under Article 5 Paragraph 1 of the Act on Submission of Overseas Wire Transfers for Purpose of Securing Proper Domestic Taxation (Act No. 110 of 1997) is to be filed according to the rules specified in the Ordinance on the Act on Submission of Overseas Wire Transfers for Purpose of Securing Proper Domestic Taxation (Financy Ministry Ordinance No 96 of 1997).”

 

(Okubo) “Question fourteen: In the answer to my last question four, the government said that bitcoin transaction may as a general rule be subject to consumption tax. If for example on a bitcoin exchange in Japan one bitcoin was sold for fifty thousand yen, does that mean that at present tax rates there would be a consumption tax of 2,500 yen to be paid, in the opinion of the government? In that case, does the consumption tax also apply to the fees of the exchange, and the fees for wiring the money? Also, if there is a consumption tax obligation, who would be the person obliged to pay that tax?”

(Govenment) “It is necessary to decide case by case on individual taxation issues. Also, it is not exactly clear what “one bitcoin was sold for fifty thousand yen at an exchange based in Japan” means. Therefore it is difficult to give a general answer. As a general rule, if this is disposing of an asset under Article 4 Paragraph 1 of the Consumption Tax Act (Act No. 108 of 1988), and it does not fall under one of the exceptions under Article 6 Paragraph 1 of that Act, it would be subject to consumption tax.

“Also, as to the person obliged to pay the tax, it is the business that has disposed of the asset, except if it is one exempt under Article 9 Paragraph 1 of that Act.”

 

Published by kflenz

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

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