December 19, 2022

From Anime To Metaverse: Japan Prepares To Re-Emerge As Digital World Leader

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Japan, a country once known for its unique technological advancements (think smart toilets), but which has lagged behind in digital technology and still adheres to old school practices (think seals and fax machines), is aiming to position itself as a leader in the Web 3.0 sphere with a national strategy to boost its digital economy. In his October 3, 2022 policy speech, Prime Minister Fumio Kishida announced Japan's plans to invest in a digital transformation, including an expansion into the metaverse and NFTs.

Earlier this year, the Kishida administration established the Project Team regarding NFT Policies under the Liberal Democratic Party's Headquarters for the Promotion of a Digital Society. The Project Team published a comprehensive NFT White Paper on Japan's NFT Strategy for the Web 3.0 Era, which is notable for being drafted by politicians and lawyers rather than the bureaucrats who ordinarily are in charge of policy. The White Paper details the Team's study and solutions to address issues that are inhibiting the growth of blockchain-related business in Japan as well as those faced generally in the blockchain ecosystem. In July 2022, Japan's Ministry of Economy, Trade and Industry (i.e., the bureaucrats) also established the "Web 3.0 Policy Promotion Office" responsible for formulating policies in tandem with other departments and offices across the ministry. In short, Japan recognizes Web 3.0 as the next frontier, and is gearing up to promote Web 3.0 literacy among Japanese users and businesses and to offer solutions that would disincentivize blockchain startups from moving overseas.

Some key initiatives discussed in the White Paper are worth noting. One of the major hurdles to setting up a blockchain business in Japan is the corporate taxation of crypto assets. A company that issues tokens and retains a certain number without selling them could be subject to corporate taxation on unrealized gains under Japan's tax laws if the tokens are deemed to be "crypto assets for which there is an active market." Such taxation imposes heavy burdens on companies precluding blockchain startups from developing in Japan. The Project Team recommends a tax reform to exempt such tokens and to only assess tax when they generate a profit. Similar revisions are proposed on the income tax and consumption tax laws from the end-user side as well. For example, Japan's income tax laws require profits and losses from crypto asset transactions to be taxed at the maximum rate of 55%, and gains or losses are also taxed when a crypto asset is exchanged into dollars, Yens, or other crypto assets. The Project Team recommends reexamining the taxation of crypto assets, including reducing the tax rate to 20%. In line with these recommendations, tax reforms to benefit crypto startups and individual investors are being called for or considered in the country's tax reform proposals for 2023.

An additional issue which may be preventing the NFT business from taking off in Japan is the potential application of Japanese gambling laws, which carries a criminal fine of no more than 500,000 Yen (approximately $3,600) or an administrative fine. The concern with providing a service like the popular NBA Top Shots in Japan is that the random nature of sales (where a collector does not know the contents of a pack before purchase) and the ability to resell in the secondary market could be found to violate the gambling regulations if it is deemed to be stimulating the purchaser's gambling spirit. To quell such concerns, the Project Team proposes establishing a framework whereby government agencies respond to questions from service providers about the applicability of gambling charges before bringing a service to market. In a similar vein, the Project Team contemplates appointing a minister in charge of Web 3.0, and a "one stop consultation desk" that handles Web 3.0-related consultation from members of the public.

Another notable discussion is on promoting a better understanding of the NFT business. Japan has a rich IP content in the field of games, manga, and anime, for example, but content owners may be hesitant to enter the NFT business if they do not fully understand it. To make the NFT business more accessible, the Project Team recommends establishing information sessions and consultation desk services for content owners, as well as creating a standardized template of the license terms with an explanation of the clauses (much like the Can't Be Evil license), rather than having varied terms created by individual market platform operators.

The White Paper also addresses common problems like the unauthorized minting of NFTs by those that do not own rights to the underlying work. Noting the availability of existing Japanese law such as the Provider Liability Limitation Act as a possible avenue of recourse, but recognizing its limitations, the Project Team recommends government ministries and agencies to empower the marketplace to establish an organization that will centrally manage the identification, verification, corporate existence, and authorization of NFT sellers, and to cause marketplace operators to examine NFT sellers to vet their identities and permission statuses, which could aid in combatting the minting of unauthorized NFTs.

Further, recognizing DAOs as a new form of governance and, much like the US where certain states are permitting DAOs to legally incorporate as LLCs, the Project Team encourages the Japanese government to enable the incorporation of a DAO as a "national strategic special zone," and to clarify the legal status of DAOs as well as the rights and obligations of its members under Japanese law.

The above are just some examples of the issues discussed in the White Paper, but they highlight a serious push to overhaul Japan's existing laws and regulations to accommodate the evolving NFT and Web 3.0 economy. It looks like we can expect to see more activity coming from Japan in 2023, as Japanese telecom giant NTT Docomo has recently announced that it would invest 60 billion Yen (approximately $415 million) in the metaverse, and the Japanese NFT market is projected to grow by 53%, or reach a $1.36 valuation by year-end despite reports of trading losses globally.

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