The 2019 amendment to the Financial Instruments and Exchange Law (“FIEA”) has made transactions in cryptoassets subject to unfair transactions, the same regulations that is applied for security transactions.

Unfair Transactions

Unfair transactions subject to regulation refer to the following.

■Prohibition of fraud (Article 185–22 of the FIEA)

■Prohibition of pump and dump, counterfeiting, assault or intimidation (Article 185–23 of the FIEA)

■Prohibition of market manipulation (Article 185–24 of the FIEA)

In the following paragraphs we review a simplified explanation of what each of these transactions are.

Please note that this interpretation is based on the author’s understanding and is not based on the views of legal experts.

The specifics of each type of unfair transactions are the following.

Fraud

Fraud is defined as for cryptoassets,

(1) To use unfair means, plans, or techniques

(2) Generating profit by using a document, etc. that contains a false representation of an important matter or lacks a material necessary for avoiding misunderstanding.

(3) Using false quotations for the purpose of inducing cryptoasset trades, etc.

In cash of a breach, penalties are imprisonment for not more than 10 years or a fine of not more than 10 million yen, or both (Article 197, Paragraph 1, Item 6 of the FIEA).

Pump and dump, counterfeiting, assault or intimidation

This applies to disseminate rumors, deceive, assault or intimidate someone for the purpose of trading or changing the market price of cryptoassets, etc.

Rumor means “false information,” and dissemination means “to be widely known”. It is prohibited to deceive others by spreading false information for one’s own benefit, or to assault or threaten others.

In cash of a breach, penalties are imprisonment for not more than 10 years or a fine of not more than 10 million yen, or both (Article 197, Paragraph 1, Item 6 of the FIEA).

Market Manipulation

Market manipulation is defined as committing specific acts with the purpose of misleading others into believing that one of the transactions in cryptoasset is frequently conducted, or with the purpose of misleading others regarding the status of these transactions.

Article 185–24 of the FIEA provides specific provisions, for example, the following transactions are regulated.

EX: “Chumming and wash sale”

Wash sale is a transaction in which market participants simultaneously execute their own sell and buy orders, and in which the purpose is not the transfer of rights. Chumming are transactions in which the seller and buyer work together to conduct wash sale. Both types of transactions are conducted to disguise the fact that the transaction is active.

EX: “Spoofing”

Spoofing is the activity of misleading market participants by placing an order with no intention of executing it in order to get a better price.

For example, a trader place many buy orders in order to elevate the price, and then cancels the orders.

Penalties for market manipulation are imprisonment for not more than 10 years or a fine of not more than 10 million yen, or both (Article 197, Paragraph 1, Item 6 of the FIEA).

The regulations are not limited to committing obvious criminal acts such as assault or intimidation, but also include spreading false information for one’s own benefit and placing orders with no intention of transaction.

Sometimes opinions on Twitter and other social networking sites are aiming to elevate a particular name, but one must be careful not to commit the above activities in heat.

Insider Trading Regulations

Insider trading is not included in the regulatory scope of the 2019 amendments.

This is because (1) the issuer of crypto assets does not exist or is difficult to identify even if they exist, and (2) there is no established view on the factors that cause price fluctuations of crypto assets, making it difficult to identify in advance “undisclosed material facts that significantly affect customers’ trading decisions,” which is necessary to impose insider trading regulations.

However, the self-regulation of the Japan Virtual and Crypto assets Exchange Association (JVCEA) stipulate that when an order is placed related to information obtained by a person who possesses crypto asset-related information, the information will be reported to the Exchange’s Trade Review Department, which will take measures such as issuing a warning, suspending the order, or suspending trading.

*References

• House of Councilors Standing Committee Research Office and Special Research Office, “Institutional Development Regarding Crypto Assets (Virtual Currency)”

https://www.sangiin.go.jp/japanese/annai/chousa/rippou_chousa/backnumber/2019pdf/20190508026.pdf

• Japan Exchange Group “Market Manipulation”

https://www.jpx.co.jp/regulation/preventing/manipulation/index.html

• JVCEA “Rules for the preparation of a Management System for Cryptoasset-Related Information regarding Cryptoasset Exchange Business”.

https://jvcea.or.jp/cms/wp-content/themes/jvcea/images/pdf/B13_jvcea202005.pdf