Xangle Research Crypto Asset Market : Japan in 2020 · as in-house rules (9) Important Agreement (10) Meeting of stockholders and board of directors (11) Data on audit of audit stations

June 2020

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Regulation & Policies

Crypto Asset Market : Japan in 2020

Xangle Research

1. Regulations Overview Three Types of Regulation

France, Germany, Abu Dhabi

(1) Bespoke Regulation (2) Retrofitted Regulation (3) Existing Regulation

Korea, United Kingdom, Canada, Japan China

Source : CCAF Global Cryptoasset Regulatory Landscape Study (2019),Autorite des marches financiers (AMF)(2019)

Creation of new regulations

As per existing regulations, an Initial Coin Offering (ICO) is an unlicensed (unauthorized) security offering. All ICO and ICO-related businesses are illegal.

Autorité des MarchésFinanciers (AMF), the French stock market regulator, has created separate regulations for Digital Assets Services Providers (DASP)

Revised the Fund Settlement Act and the Financial Transactions Act.

• Mandatory reporting of all assets handled by crypto exchanges

• Prohibits market manipulation• Prohibits the spread of fake news

Revision of existing regulations Applying existing regulations

Japan has revised its financial regulations to include Crypto AssetsThree types of Crypto Asset regulation: (1) Bespoke, (2) Retrofitted, (3) Existing

1. Regulations Overview Background into the Japanese Regulation

A major hacking incident put the regulators to workIn January 2018, Coincheck was hacked and approximately 500 million NEM tokens ($530 million) were stolen

2017 2018 2019 2020

2017-04 2018-01

2018-03

2019-05 2020-05

Introduction of the Crypto Asset Exchange Registration System

Coincheck hacked ($530M USD)

Security inspections of unregistered exchanges results in seven ‘improvement orders’ and two 30-day suspension orders

2018-04

Founding of the Japan Virtual Currency Exchange Association (JVCEA)

The Payment Services Act & The Financial Instrument and Exchange Act passed by the House of Councilors (Upper)

The Payment Services Act & The Financial Instrument and Exchange Act are in effect

- Crypto assets are regulated by the Payment Services Act alongside other financial products

- Regulation (limits) on crypto margin trading- Obligation to separate company holdings and

customer holdings (custody)- Obligation to store in cold wallets- Obligation to report on all assets handled by

the exchange (prior to listing / handling)- Defines the asset class as “Crypto Assets”

2018-10

Financial Services Agency (FSA) approves JVCEA as a self-regulatory body

Source : A Study on the Taxation System and Tax infrastructure in Cryptocurrency(2018), Press (blockinpress.com)

2019-07

Bitpoint hacked ($32M USD)

1. Regulations Overview Regulation & Impact on Individual Market Players

Every market player is regulated, one way or another. Strong regulatory pressure slowed the growth of the Japanese crypto industry (once one of the biggest in the world)

Crypto Asset Exchanges Crypto-financed Projects Crypto Traders & Investors

New listings are regulated by the FSA, the exchange, then the JVCEA• FSA: Audit/review by regulators• Exchange: Internal review process• JVCEA: Oversight of exchange reviews

• High tax rate• Mandatory reporting of any profits• Limits margin trading to 2X

• Mandatory registrations (license)• Detailed obligations & conditions

(Listing due diligence, separation of exchange-owned and customer-owned assets, cold wallet storage…)

Delisting of private coins (crime risk)

Stellar Lumen (XLM) is the only project to pass the FSA review in 2019, with just three more projects in 2020 (Strict listing review)

Margin trading has been a big driver of volume in Japan. With the new limits, the market expects more altcoin listings to bolster spot trading.

(3 new projects approved by the FSA in a 6-month span already)

Decrease in the number of crypto exchanges operating in Japan

(Since April 2017, as per the Payment Services Act, crypto exchanges must get licensed and register with the FSA)

Impact Impact Impact

Source : A Study on the Taxation System and Tax infrastructure in Cryptocurrency(2018), Japanese Financial Services Agency

1-1. Exchange Regulation The Registration Process

FSA regulates exchanges extensively, both before and after registrationThe 5-step registration process includes a 100-page questionnaire, plus further monitoring & scrutiny after registration

Step 1

The 100-page questionnaire

Step 2 Step 3 Step 4

FSA Fintech Monitoring Team requests amends before approval

FSA checks the project’s roadmap and plans (discussion & written

submissions)

Visits the project team to validate steps 1~3

(de-facto due diligence)

Step 5

Project team can now register (and wait for

final FSA approval)

• Exchange Registration Procedure• Business model• Rules for listing crypto assets• Risk Management• Internal audit• Separation of the company

& user holdings (custody)

• User information Managements• External consignment

(outsourcing) Management• Security management• Prevent money laundering and

terrorist financing (AML/CFT)

Evaluation items Regulation after Listing

• Virtual Assets Monitoring Team (FSA) – maintains & strengthens registration requirements in order to shut down loopholes & abuses.

• Ministry of Finance – created a system where the authorities can request for personal information of individuals suspected of tax evasion*

• National Tax Agency – built a database of crypto asset investors

Source : A Study on the Taxation System and Tax infrastructure in Cryptocurrency(2018)Japanese Financial Services Agency

*Limitations: Individuals with 10+ million Yen in taxable income, suspected of failing to report more than half of their earnings

1-1. Exchange Regulation The Registration Process

Exchange Registrations & Major Events (Timeline)Total of 23 Exchanges are registered as of May 15th, 2020

2017-09-29 2017-12-01

2017-12-26

2019-01-11

2019-03-25

2019-09-06

2019-11-27

2019-12-24

2020-03-30

2017 2018 2019 2020

Tokyo Gateway

Bit Station

Renounced or Denied

2017-04 2018-01

2018-03

2019-05 2020-05

Source: Japanese Financial Agency, Press (Business Insider, Nikkei, bitcoin.com)

Registrations beginCoincheck

Hacked

Security inspections & improvement orders to unregistered exchanges

2018-04

Launched JVCEA

The Payment Services Act & The Financial Instrument and Exchange Act passes the House

The May 2019 Acts are In effect (May 1st, 2020)

2019-07

Bitpoint hacked

1-2. Crypto Project Regulation Three-part Due Diligence

Separate project evaluations by the exchange, the JVCEA, and/or the FSAThese evaluations are a prerequisite to any listing or trading within Japan

Source : JVCEA

Evaluation by Exchanges JVCEA Whitelisting Review Permit to List / Trade

Required Documents (Can differ slightly by exchange)

(1) Certificate of Registry

(2) Tax return form

(3) Income statement, business report,

and supplementary schedules

(4) Cash flow statement

(5) Articles of association

(6) List of related companies

(7) Accounting documents and business

reports of related companies

Evaluation Criteria

(1) Independency and soundness

(2) Governance and internal management system

(3) Financial status and soundness

(4) Eligibility of the target

(5) Systems for the performance target

(6) Prospects of the target

(7) Feasibility of the purpose of financing

(8) Working manual, such

as in-house rules

(9) Important Agreement

(10) Meeting of stockholders

and board of directors

(11) Data on audit of audit stations

(12) Data on internal audits

(13) Business plan

(14) Planned balance sheet, profit or loss

statement, and cash flow statement

(15) Data on the use of financing funds

(16) Company Overview

(17) List of shareholders

(18) White Paper

(19) Materials on accounting

(20) Data on target projects

1-3. Crypto Asset Investors Risk of High Taxes

Investors face the risk of higher tax on crypto asset gains vs stock gainsGains from crypto assets are classified as miscellaneous income (as opposed to that of stocks being classified as capital gains).The Japanese government has a progressive tax rate system (higher rates for larger income).

Source : Japanese FSA, A Study on the Taxation System and Tax infrastructure in Cryptocurrency(2018)

5%

10%

20%23%

33%

40%

45%

15%

10% 10% 10% 10% 10% 10% 10%5%

0

10

20

30

40

50

60

~1.95 JPYm 1.95~3.3 JPYm 3.3~6.95 JPYm 6.95~9 JPYm 9~18 JPYm 18~40 JPYm over 40 JPYm flat rate oncapital gains

residental tax aggregated income tax Capital gains tax

(%)

Tax rate on capital gains (crypto) : Aggregated income tax + Residential tax of 10%

Tax rate on capital gains (stock) : Capital gains tax 20%

(Income tax 15% + Residential tax of 5%)

55%

50%

43%

33%30%

20%

15%

1-3. Crypto Asset Investors Risk of High Taxes

These rates can be much higher compared to other countries

progressive tax calculated from aggregated income

Japan

progressive tax calculated from capital gain

The United States*

** No taxers apply for holdings of 1+ years

AustraliaGermany ** Canada

0%

19%

32.5% 37%45%

0%

20%

40%

60%

80%

100%

~39,400AUD

over 39,400~74,000

AUD

over 74,000~180,000

AUD

over180,000

~360,000AUD

over360,000

AUD

0%

19%

32.5% 37%45%

0%

20%

40%

60%

80%

100%

~18,200AUD

over 18,200~37,000

AUD

over 37,000~90,000

AUD

over90,000

~180,000AUD

over180,000

AUD

15% 20%30% 33%

43%50% 55%

0%

20%

40%

60%

80%

100%

~1.95 JPYm over 1.95~3.3JPYm

over 3.3~6.95JPYm

over 6.95~9JPYm

over 9~18JPYm

over 18~40JPYm

over40 JPYm

0%

26.375%

0%

20%

40%

60%

80%

100%

less than 600 EUR Over 600 EUR

Holding for less than a year Holding more than a year***Holding for less than a year

7.50% 10.25% 13.00% 14.61% 16.50%

0%

20%

40%

60%

80%

100%

~48,535CAD

over48,535 ~97,069

CAD

over97,069 ~150,473

CAD

over150,473 ~214,368

CAD

over214,368

CAD

10% 12%22% 24%

32% 35% 37%

0%

20%

40%

60%

80%

100%

~9,875 USD over 9,875~40,125 USD

over 40,125~85,525 USD

over 85,525~163,300 USD

over 163,300~207,350 USD

over 207,350~518,400 USD

over518,400 USD

Holding for less than a year

0%

15% 20%

0%

20%

40%

60%

80%

100%

~40,000 USD over 40,000~441,450 USD

over 441,450USD

Holding more than a year

Source: A Study on the Taxation System and Tax infrastructure in Cryptocurrency(2018),, bankrate.com, Internal Revenue Service (US),Government of Canada, Australian Government, Federal Central Tax Office (Germany), PwC

*Calculations based on unmarried persons

*** Unmarried & 1+ year of holdings = only half the profits are taxed

1-3. Crypto Asset Investors Unfavorable Taxation Policies

Losses from crypto assets does not deduct from taxable capital gainsCountries including the US, Germany, Australia, and Canada classify crypto asset gains/losses as capital gains, effectively reducing the taxable total sum when the crypto asset investment results in a loss.

TaxationCapital gains and losses deductionSale or

Gift/InheritTrading or Exchange

Exchange to Fiat

Purchase ofGoods / Services

Japan O O O O X

Capital gains from crypto assets are classified as miscellaneous income; separated from other capital gains and losses.

US O O O O O Deductible up to $3,000 from income if capital losses exceed capital gains

Germany O O O X O Losses can be offset by subsequent (unlimited) capital gains from a year ago.

Australia O O O O O Losses can be offset by capital gains

Canada O O O O O Losses can be offset by capital gains

➢ Obligation to report (Japan): Every taxpayer must report the type, purpose, and value (market price) of their crypto holdings (2019~)

Source: A Study on the Taxation System and Tax infrastructure in Cryptocurrency(2018), bankrate.com, Internal Revenue Service (US), Government of Canada, Australian Government, Federal Central Tax Office (Germany), PwC

2. New Listings in 2020 Three Projects Added to the Whitelist as of April 23rd

QTUM, BAT, HT given green light to Japanese Investors

QTUM Huobi Token *

• Token Type : Mainnet Token

• Market Cap: $174,404,927 USD (#45)

• QTUM is a hybrid blockchain application

platform that uses the PoS consensus

algorithm. It is an UTXO-based smart

contract system, the first of its kind.

• Token Type: Exchange Token (Huobi)

• Market Cap: $970,757,245 USD (#18)

• Huobi Token is an exchange token

issued by Huobi to pay for its

services and to participate in

community/governance votes.

* Japanese FSA confirmed on April 23rd

Coincheck (03/12/2020) Huobi Japan (TBD)

0

200

400

600

800

0.0

1.0

2.0

3.0

4.0

Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20

Tx volume (Right) Price (Left)(USD) (USDm)

0

200

400

600

800

1,000

1,200

1,400

0

1

2

3

4

5

6

Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20

Tx volume (Right) Price (Left)(USD) (USDm)

Whitelisted (JVCEA) & Listed on Japanese Exchanges

Basic Attention Token

• Token Type: ERC-20

• Market Cap : $361,046,240 USD (#35)

• Brave is a free and open-source web

browser that blocks ads and website

trackers and provides a way for users to

send cryptocurrency contributions.

GMO Coin (03/18/2020)

0

50

100

150

200

250

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20

Tx volume (Right) Price (Left)(USD) (USDm)

Market Cap (Ranking): Based on CoinMarketCap as of June 8th, 2020

QtumMarket Cap Rank #45: QTUM is the Mainnet token for the Qtum Network, a public blockchain that combines the technologies of Bitcoin and Ethereum.

Description of CompanyQtum is a hybrid blockchain application platform. Its core technology combines a fork of bitcoin core, an Account Abstraction Layer allowing for multiple virtual machines, including the Ethereum Virtual Machine (EVM), and a Proof-of-stake Consensus protocol, aimed at tackling industry use cases. The Qtum Foundation, headquartered in Singapore, is the decision-making body that drives the project’s development.

Founded 2018-Oct-25

Token Usage

QTUM is the official medium of exchange on the Qtum Network. Any value creation is rewarded with QTUM, and any use of its services requires payments in QTUM.

Partnerships

China

DApps

VevueVideo Platform

BodhiMarket Prediction

HyperPayPayment system

BitClaveSearch Engine

Source: Xangle, qtumeco.io

Officially Launched: 9, Prototype: 5

https://xangle.io/project/QTUM/full-disclosure

New Listed Projects in Japan (2020)

Basic Attention TokenMarket Cap Rank #31: Medium of exchange in the Brave Network. Bought and sold by advertisers, hosts, and users to make digital advertising much more efficient.

Description of CompanyBrave, developed by Brave Software Inc, is a free and open-source web browser based on the Chromium browser. The browser blocks advertisements and website trackers and provides a way for users to send cryptocurrency contributions in the form of Basic Attention Tokens to websites and content creators.

Founded2015-May-28

Token UsageBAT is the medium of exchange between value creators and users. Users receive BAT for watching ads and can choose to sell on an exchange or contribute to other value creators. As a part of its partnership with TAP network, BAT can be used on making purchases at American Airlines, Delta Airlines, Hotels.com, Uber, Amazon, Apple, Target, Walmart, HBO, and more.

Partnerships

StatsBrave Browser• MAU 15.4M people (2.25x over a year)*• Recorded 5.3M people in DAU*• Support Brave ad over 183 countries

BAT**• Total wallet 749,456• Increasing Rate 87.25% YoY• Increasing Rate 5.11% MoM

Source: Xangle, brave.com

Based on announcement on June 1, 2020** Based on June 2, 2020https://xangle.io/project/BAT/full-disclosure

New Listed Projects in Japan (2020)

Huobi TokenMarket Cap Rank #18: Huobi exchange-issued token for the Huobi ecosystem.

Description of CompanyHuobi Global is a global leading digital asset financial service provider dedicated to the transaction of crypto-assets and the provision of related services. Since its establishment in 2013, Huobi Group has been financed by ZhenFund and Sequoia Capital. Its accumulative turnover has exceeded USD 1.2 trillion, and the firm delivesr its secure and credible digital asset trading and management services to millions of users in over 130 countries.

Founded 2013-May-01

Token Usage

Partnership

Token BurnMonthly Token Burn: Burnt 41.1% of Market Circulation

Huobi’s total token supply

Current Circulation58.90%

Over 100+

Source: Xangle, huobi.com

Huobi Token is an exchange-issued token by which users can purchase a service fee package at a discount on Huobi Pro, vote on exchange decisions, gain early access to special events held by Huobi Group, and more. This token is issued and managed through the blockchain platform. Huobi plans to benefit HT holders by providing sub-token rewards, as well as the promotion brought by sustained repurchase and destruction.

https://xangle.io/project/HT/full-disclosure

New Listed Projects in Japan (2020)

2. New Listings in 2020 Three Projects Added to the Whitelist as of April 23rd

QTUM, BAT, HT were whitelisted & made available in Japan because…

QTUM Huobi Token *

Coincheck (03/12/2020) Huobi Japan (06/16/2020)

The projects proved their financial stability and complied with the national standards set forth by regulators

Basic Attention Token

GMO Coin (03/18/2020)

• (Financial) Shared its detailed expense account (fixed costs)

• (Compliance) Actively responded to regulator requests

• (Technical) Mainnet was launched a good 2 years ago (Sept 2017) and has 1,980 global nodes (proof of sufficient decentralization). The project proved that it has stable operations & that its operations are transparent.

Source: Xangle, brave.com, huobi.com

• (Financial) Steady business operations (exchange) followed by regular token burns

• (Compliance) Huobi Exchange officially entered the Japanese Market (registrations)

• (Technical) Testnet launch on February 2020

• (Financial) Constant Ad Revenue from 183 countries

• (Compliance) Established Brave Software Asia, a Japanese Subsidiary. Complied with local Financial Regulations (BAT Points instead of BAT Tokens for Japanese Users)

Appendix: Xangle interview with Coincheck

What are the reasons for Qtum's listing on the Japanese exchange?

Qtum was satisfied with all three of the following requirements, especially among the essential requirements.

1. Projects should faithfully answer numerous questions that JVCEA requires2. Projects should own enough liquidity (e.g. Already been listed in big exchanges) 3. Projects should not own gambling or casino dapps

FSA's main concerns are following:・No gambling Dapps: They must provide the public announcement that they do not support such dapps. The best way is to contact each dapps to stop the IP access from Japan.・No anonymity: Japan doesn't have regulation about the anonymous currency yet. better not to have the feature right now.・Use case: Provide use cases. It is important to prove how the crypto used.・Providing information: The publisher must provide the roadmap and the budget information to support the project. There are more questions to come, so the publisher must be available to answer those questions.

Appendix: Interview with Qtum

Q> What effort did Qtum make for the listing Japan?A> Japan has been one of the largest bitcoin markets, and the leading compliance environment. We have been considering to enter the Japanese market since 2017. But we've been waiting for the right time over the years because the FSA was not very open to adding new tokens to their token whitelist. In 2019, when changes were made by the FSA, we have been actively promoting since then, waiting for a good time to enter the Japanese market. We have also actively cooperated with local agencies in compliance requirements in Japan.In terms of technology, Qtum has achieved a lot of innovation and has been running reliably for three years. Qtum networks are highly decentralized and transparent. In addition, Qtum has the highest number of global nodes in the block chain network. Also, we regularly open our expenditures. This is, of course, in line with Japan's policies and regulations, and I think it was a great help for Qtum's listing in Japan.

Q> Does the Qtum listing signal a change to the tough listing requirements in Japan?A> Japanese listing regulation is one of the most rigorous requirements among the world. New listing only shows that Japanese regulators are openminded about cryptocurrency but also still very strict with the listing rules to protect the investors.

Q> Could you share the roadmap of Qtum in 2020?A> We believe that the technology is a key role for Qtum, and we released our 2020 overall roadmap which can be found on our official website: https://qtum.org/en. In terms of business cooperation plans for the coming year, we are working hard on compliance and alsobuilding more cooperative relationships with compliant exchanges all around the world.

1. Market overview

2. Regulation & Policies

3. Traditional financial entities entering crypto market (Coming soon)

Thank you.

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