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The approval of spot crypto exchange traded funds in the US, Hong Kong and other markets has highlighted the contrasting and conservative approach being taken by Japan’s regulators.
Japan has long billed itself as a digital asset-friendly country as part of wider ambitions to become a larger asset management hub. But there is a reluctance at the policy level to take the plunge and lift the tax and regulatory restrictions needed for widespread adoption.
Japan’s Ministry of Finance is widely known to be sceptical about cryptocurrencies in general, according to Oki Shiozawa, investment director at Sumitomo Mitsui Trust Asset Management.
“I can’t think of any way to successfully persuade those authorities at the moment,” he said.
“I am not saying that crypto-related ETFs are impossible,” Shiozawa added. “However, Japan’s Financial Services Agency, which approves financial products, is basically conservative.”
In January, after months of debate, the US Securities and Exchange Commission granted approval for the first spot bitcoin ETFs. Approval for spot ETFs that hold ether, the second-largest cryptocurrency, was granted in July.
In April, financial authorities in Hong Kong granted approval for bitcoin and ether-backed ETFs. Australia followed suit in May, with other Asia-Pacific markets also gearing up to advance their domestic digital asset industries.
Against this backdrop, domestic digital asset advocacy groups began calling for authorities to approve the launch of crypto-backed ETFs in Japan.
At the heart of those calls are the significant tax advantages that crypto ETFs would bring.
Profits from general cryptocurrency investments are treated as miscellaneous income in Japan and are therefore subject to a maximum tax rate of 55 per cent. ETFs, on the other hand, which can be traded on the securities market, are treated as capital gains.
This makes ETFs subject to a lower tax rate of around 20 per cent, offering a more attractive proposition for investors looking to diversify their portfolios via digital assets. Spot crypto ETFs would also feature tax perks like loss carry-forward.
But, according to Keisuke Kimura, vice-president of the Japan Cryptoasset Business Association and a former financial adviser at SMBC Nikko Securities, a lot would have to change for the regulators to act on introducing these potential benefits.
“The current situation in Japan is primarily due to regulatory constraints, as our laws don’t currently permit the inclusion of crypto assets in investment trusts, including ETFs,” Kimura said.
“For this to change, there needs to be a broader societal acceptance that crypto assets can contribute positively to the asset formation of Japanese citizens,” he added.
That picture is complicated by large-scale crypto scandals in Japan, including MTGox and DMM, that resulted in the loss of hundreds of millions of dollars’ worth of bitcoin.
“While family offices and corporate venture capital firms with agile decision-making processes may be ready to move forward, many traditional large asset managers, insurance companies, and financial institutions are still developing their understanding of crypto assets and risk management protocols,” he said.
Some traditional large asset managers are already making preparations for launching crypto ETFs in Japan once regulators give the green light.
Franklin Templeton and Japanese financial services group SBI Holdings announced in July that they were partnering to set up a new digital asset joint venture that would develop new products, including cryptocurrency ETFs.
SBI Holdings already has partnerships with UK-based Man Group and US private equity firm KKR on similar endeavours. Nomura has also set up a digital asset subsidiary.
Many in the digital asset sphere interpreted the SBI-Franklin Templeton tie-up as a sign that regulatory change could be on the way to Japan.
But the FSA, while showing a willingness to discuss crypto regulation throughout this year, has provided no indication that wholesale changes to the digital asset industry, including the approval of spot crypto ETFs, are imminent.
*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignitesasia.com.
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