Bitcoin will become a legal payment method in Japan tomorrow. Is the increased burden on exchanges and users really a good thing?

According to reports, Japan's Financial Services Agency (FSA) officially announced last week that Japan's first bill that includes digital currency and recognizes Bitcoin as a payment method will come into effect on April 1 (tomorrow), and the bill will officially become law.

Bitcoin officially becomes a legal payment method in Japan

The bill recognizes Bitcoin as a means of payment, not a currency. BitFlyer, Japan's largest Bitcoin exchange by volume, explains that Bitcoin has "asset-like value." BitFlyer describes Bitcoin as a means of payment to purchase or rent goods, or to charge for services, and can also be transferred through electronic data processing systems.

“The new law defines Bitcoin and other virtual currencies as a method of payment rather than a legally recognized currency. Bitcoin will continue to be treated as an asset unless Japanese tax laws are revised in the future.”

Burdens on exchanges and their customers

While Bitcoin is officially recognized as a payment method, the bill also imposes a number of requirements on Bitcoin exchanges. Exchanges will be required to register with the Japanese Prime Minister and must also meet a number of other requirements.

For example, the exchange must have a capitalization of at least 10 million yen and must have an IT system that is adequate to prevent theft and loss. The exchange must also establish a variety of systems and processes involving employee training, internal regulations, governance, and outsourcing guidance.

The bill, which will come into effect on April 1, also amends the Prevention of Transfer of Proceeds of Crime Act. We have recently reported on how these amendments will affect Bitcoin exchanges and their customers. In order to comply with the provisions of the bill, exchanges are introducing stricter KYC procedures.

Accounting uncertainty

The new bill “will put Japan’s early bitcoin adopters in an accounting dilemma,” Nikkei Asian Review reported on Wednesday. Japan’s current accounting standards do not cover digital currencies, so there are no available guidelines on how to properly report digital currencies for tax purposes.

As a result, many people and businesses may not record their digital currency holdings on their books. Those who do report their digital currency holdings typically include the bitcoins in the "asset category" of their balance sheets. Issuers often call it a "liability." However, the lack of standards means that "companies holding digital currencies may make errors in valuation or suddenly have large losses on their books, said Chikako Suzuki, a partner at PricewaterhouseCoopers.

The Nikkei Asian Review wrote:

"Japan's Accounting Standards Board decided on Tuesday to begin considering a framework for virtual currencies, which is expected to take six months."