FinTech Support Desk

Q:  What kinds of regulations exist for FinTech businesses? We have heard that the registration/notification with the FSA and/or the Local Finance Bureaus is required to start a business. What are we required to do in particular?

A:  Due to diversity and a wide range of potential of FinTech business, the applicability of financial laws and regulations such as the “Banking Act,” the “Financial Instruments and Exchange Act,” and the “Payment Services Act” may vary depending on the respective business schemes. Some businesses may neither be subject to any financial regulations nor be required to carry out registration/notification. Therefore, it is preferable to consult with FinTech Support Desk about your intended business scheme. FinTech Support Desk also welcomes inquiries on your business ideas at the initial planning stage.

A:  For ensuring transparency and efficiency in administration, the FSA provides an outline of the standard screening process for applications for new registration with the FSA/Local Finance Bureau as well as the corresponding contacts based on the respective types of inquiries/applications. For details, please refer to the following URLs. Should you have any further queries in respect of application procedures, please feel free to contact FinTech Support Desk. (fintech@fsa.go.jp)

〇Toward Further Efficiency and Transparency in the Screening Procedure for the Licensing and Registration of Financial Businesses

・Outline of the Standard Screening Process for Applications for New Registration with the FSA/Local Financial Bureau

・A list of contact points for inquiries and application with regard to application for new (first-time) registration

Q:  How did the discussion turn out pertaining to the methods of identity verification for non-face-to-face transactions in FinTech business other than having a customer send an identification document or its copy, and then sending documents related to the transaction to the customer’s address by registered mail as a postal item requiring no forwarding?

A:  As prescribed in Japan's “Growth Strategy 2017” (approved by the Cabinet in June 2017), in order to deepen discussions for efficient identity verification in tandem with FinTech development, the Fintech Association of Japan (FAJ), the Japan Association of New Economy (JANE), and the FSA jointly established the “Study Group on Online Trading in the Age of FinTech.”
Based on the outcomes from the Study Group, the FSA and the National Police Agency (NPA), which has the main jurisdiction over the “Act on Prevention of Transfer of Criminal Proceeds,” carried out further discussions on efficient identity verification.
As a result, the NPA, the FSA and other competent administrative agencies have published the “Order to Amend the Ordinance for Enforcement of the Act on Prevention of Transfer of Criminal Proceeds,” which sets out rules for new identity verification methods that are to be completed online.
 (Most of the amendments were promulgated and enforced on November 30, 2018, while the remainder will be enforced on April 1, 2020).
The new methods for verifying natural persons online are as follows:

Q:  We intend to start cryptoassets (virtual currency) related business. Please advise us with the overview of applicable regulations and the regulatory procedures required to start the business.

A:  The “Payment Services Act” stipulates that the following business activities are considered as “Cryptoassets Exchange Services,” in which a service provider is required to register with the FSA:

(1) Purchase and sale of cryptoassets or exchange with other cryptoassets;

(2) Intermediary, brokerage, or agency services for the business activities prescribed in (1);

(3) Management of users’ money in connection with the business activities prescribed in (1) or (2) ; or

(4) Management of cryptoassets on behalf of others (excluding cases where there are special provisions in other laws regarding the management of such assets as a business).
 

A:  In general, an ICO collectively means activities to raise funds from the public using a digital token issued by a company or an individual. An ICO may fall within the scope of the “Payment Services Act” and/or the “Financial Instruments and Exchange Act” depending on its ICO structure and nature of the token.

○ When a token issued in an ICO satisfies either of the requirements prescribed in (i) or (ii) below, the token is construed as “Cryptoassets” under the “Payment Services Act.”

(i) The token can be used for paying for goods and services, and mutually exchangeable with a fiat currency wherein unspecified persons act as counterparties.

(ii) The token is mutually exchangeable with cryptoassets wherein unspecified persons act as counterparties.

○ When a token issued in an ICO is a dividend type and is purchased with fiat currency or cryptoassets, the token is construed as the equity interest in a collective investment scheme under the “Financial Instruments and Exchange Act.”

※ Definition of the equity interest in a collective investment scheme under the “Financial Instruments and Exchange Act”: the right of an equity investor to receive dividends of profits arising from the business conducted by using money invested or contributed by the equity investors therein.

    The applicability of the “Payment Services Act” and/or the “Financial Instruments and Exchange Act” is determined depending on a case-by-case basis. For further details, please send an inquiry to FinTech Support Desk. (fintech@fsa.go.jp)

○ Initial Coin Offering (ICO) – User and business operator warning about the risks of ICOs – (published on October 27, 2017)

A:  The amendments to the “Banking Act” in 2017 introduced legislative measures inclusive of the regulatory framework pertaining to electronic payment service providers*.  The amendments were aimed at promoting appropriate cooperation and collaboration between financial institutions and finance-related IT companies as well as to ensure user protection, in response to rapid IT development and its impact on financial services.

(ii) A service that automatically creates and keeps a household account book by obtaining and aggregating account information including account balance and transaction records from banks.

A:  Article 1-3-3 of the “Ordinance for the Enforcement of the Banking Act” stipulates that the following four categories of activities are exempted from the regulations for electronic payment services, unless any of those activities are conducted by obtaining IDs and/or passwords from depositors. The reason for the exemptions is that the following activities are less likely to result in insufficient protection of service users.

(1) Transmission of settlement instructions conducted for the purpose of making periodical payments from a depositor to a particular person

(2) Transmission of settlement instructions conducted for the purpose of money transfer from a depositor to the depositor’ own account

(3) Transmission of settlement instructions conducted for the purpose of making payments from a depositor to the national and local governments

(4) Transmission of settlement instructions conducted by (i) a depositor’s counterparty to sales contracts on goods and services or (ii) the counterparty’s agent, for the purpose of making payments for the sales contracts

(2) The provider develops the system to implement electronic payment service appropriately and securely

Q:  We have heard that we have to conclude a contract with a bank when we operate electronic payment services. What kind of contract do we have to conclude and when do we have to conclude it?

A:  An electronic payment service provider must conclude a contract with a bank regarding electronic payment services before conducting an act that falls under electronic payment services (cf Article 52-61-10, (1) of the Banking Act).
In addition, the contract must include, at a minimum, particulars concerning the sharing of the liability to compensate users for any loss or damage sustained thereby, particulars concerning the measures to be taken by the electronic payment service provider to ensure the proper handling and safe control of the information on users that the electronic payment service provider has acquired and particulars on the measures to be taken by the electronic payment service provider to ensure the proper handling and safe control of the information on users that the principal electronic payment service provider has acquired, etc (cf Article 52-61-10 (2) of the Banking Act and Article 34-64-16 of the Regulation (Ordinance) for Enforcement of the Banking Act).
 

Q:  What is the difference between electronic payment service and bank agency service? Is it possible to engage in both services with single registration/authorization of either business?

A:  Bank agency service is an act of acting as an agent or intermediary for banks to conclude a contract that sets out either of the following deeds: (i) acceptance of deposits or installment savings; (ii) provision of loans or discounting of bills; and (iii) exchange transactions. Bank agency services are conducted based on the entrustment from banks, whereas electronic payment services are conducted based on the entrustment from depositors. In this respect, if certain services are based on the entrustment from both banks and depositors, those services can fall within the scope of both a bank agency service and an electronic payment service, wherein such services shall be subject to the respective regulations of a bank agency service and an electronic payment service. For example, when a bank agency service provider engages in an electronic payment service, the provider needs both registration as an electronic payment service provider and approval to conduct a bank agency service.

Q:  What kind of regulatory procedures will be required by financial laws and regulations to provide investment-related robo-advisor services?

A:  So-called robo-advisor activities can be categorized into various financial businesses, and the requirements of registration and its type pursuant to the “Financial Instruments and Exchange Act” vary depending on actual services provided in each business. Therefore, it is encouraged to consult with the FSA’s FinTech Support Desk for details of regulations beforehand.

Q:  What regulatory procedures are required under financial laws and regulations to start a new business mainly on prepaid e-money and/or e-points?

A:  The “Payment Services Act” stipulates that prepaid payment instruments are “certificates, etc., numbers, markings, or other signs” (inclusive of those whose values are recorded by a computer, server, or etc.) that are “issued for prepaid/pre-loaded values”, which can be used for payment for purchase/lease of goods and services. E-money (electric money) and e-point that are issued for prepaid/pre-loaded values fall within the category of prepaid payment instruments.

* If the total amount of the outstanding balance of the prepaid payment instruments for one’s own business prescribed in  exceeds 10 million yen on the record date (on March 31 and September 30 every year), the issuer shall give notification to the Local Finance Bureau within two months from the record date.

* The issuer of the prepaid payment instruments for third-party business prescribed in  shall register with the Local Finance Bureau in advance.

Q:  What regulatory procedures are required by financial laws and regulations to start a business offering a funds transfer service?

A:  When a person/an entity engages in exchange transactions, registration as a funds transfer service provider is required.
In general, “exchange transaction” is considered to be a conduct of an acceptance and/or implementation of transferring funds with the entrustment from a customer utilizing the system to transfer funds without a direct transport of cash between persons at a distance. (Decision of the Third Petty Bench of the Supreme Court of Japan as of March 12, 2001).
The Payment Services Act (amended in May 2021), establishes the following three types of funds transfer service according to the amount of funds that can be handled, and applies regulations depending on the risks involved.

(1) type-I funds transfer service (authorization from the FSA required)
Allowed to remit funds exceeding 1 million yen per remittance. Prohibited from accepting funds without specific remittance instructions (providers can accept funds only when the amount, date, and destination of remittance are made clear, whereby they must remit the funds immediately).

(2) type-II funds transfer service (registration from the FSA required)
Allowed to remit funds of 1 million yen or less per remittance. If the funds deposited by a user exceed 1 million yen, the funds unrelated to the remittance need to be paid back to the user.

(3) type-III funds transfer service (registration from the FSA required)
Allowed to remit funds of 50,000 yen or less per remittance. The recipient's account outstanding (the amount of obligations owed in relation to exchange transactions) cannot exceed 50,000 yen, even if it is temporary. In addition, funds deposited by users may be managed as a segregated bank deposit (subject to external audit) in place of usual preservative measures (required for Type I and Type II funds transfer services) such as security deposits.

Q:  What procedures would be required under financial laws and regulations to offer a crowdfunding platform for the solicitation of investment via the internet?

A:  Crowdfunding is generally classified into three types of schemes, namely, charity donation type, purchasing type, and investment type. (i) For the first two types, as far as the crowdfunding is used as a way to solicit charity donations or to receive the payment of consideration in exchange for goods or services, or (ii) as far as an investor does not receive a return exceeding the amount of his/her contribution, registration/notification under the Financial Instruments and Exchange Act is NOT required.(Please note that other laws and regulations, including the Payment Services Act, might be applicable.)
The investment type of crowdfunding may require registration and/or notification pursuant to the “Financial Instruments and Exchange Act” depending on the investment methods.

○ To Those who Operate Fund Related Businesses in Japan (Guidelines on Registration and Notification Requirements)

Q:  Are InsurTech companies required to get licenses in all cases pursuant to the “Insurance Business Act?”

A:  It depends on what type of business you plan. “InsurTech” has various meanings. When the business you intend to start is considered to be “insurance business”, the license on “insurance business” is required* by the “Insurance Business Act”. Also, when the intended business is considered to be “insurance solicitation”, the registration on “insurance solicitation” is required by the Act. The requirements and procedures vary based on the respective business schemes.

* Under certain conditions, you may not be required a license but registration. For details, refer to the next question regarding “Low-Cost, Short-Term Insurance Business”.

A: The system for small-claims and short-insurance businesses has been adopted since April 1, 2006. If the insurance business under the “Insurance Business Act” you intend to engage in is limited solely to insurance underwriting within a certain business scale, you may engage in business upon registration as “Low-Cost, Short-Term Insurer”.

* Insurance proceeds per one insured person should be within the scope of the amounts of the following categories, and the total amount of the respective insurance proceeds shall be 10 million yen or less.