Japan: Re-emergence of the Web 3 Giant
From Historical Roots to the Quest to reclaiming 'Crypto Capital of Asia' title
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In the wake of the U.S. government's intensified scrutiny of the cryptocurrency sector, a campaign that has been dubbed "Chokepoint 2.0," the global spotlight is increasingly shifting towards the crypto markets of Asia. While Singapore, China, Hong Kong, and Korea are often the primary focus of this attention, there lies a dormant giant on the cusp of awakening to reclaim its position as the leading crypto capital of Asia.
That country is Japan.
Takeaways for those in a hurry:
Japan's Web 3.0 ecosystem initially experienced a downturn due to stringent regulations implemented starting in 2018.
Tough regulations eventually proved beneficial as they helped insulate damage from FTX. Japan is now charging full steam ahead while other countries are slowing down
Trifecta of strong government support, Japanese’s love for collectibles and familiarity with digital assets, and significant corporate interest fuels Japan’s resurgence in Web 3
Contrary to the grassroots, bottom-up movements often driving the Web 3.0 scene in other countries, Japan’s evolution in this sector is leaning towards a top-down approach, spearheaded by influential corporate entities
Japan’s intellectual property sector — encompassing anime, manga, video games, and films — as well as the burgeoning metaverse, emerge as particularly ripe areas for innovation and growth, representing substantial opportunities for both domestic and international investors and builders
History of Japan’s Crypto Scene
2010 - 2014: Home to World’s Largest Bitcoin Exchange
Mt. Gox, a Tokyo-based Bitcoin exchange, was the largest Bitcoin exchange at that time, responsible for 70% of Bitcoin transactions at its peak in 2013
Shut down on 24th February 2014 after 850,000 Bitcoins (approx. $450 million at that point) were hacked and stolen
2017: Emergence as Crypto Capital of Asia
Following Mt. Gox's collapse, Japan established cryptocurrency regulations, becoming the first country to do so, bestowing legitimacy to Bitcoin and other virtual currencies
Legislation in April 2017 defined virtual currencies as assets and approved 11 certified exchanges and tokens for trading
Japan's regulatory approval and appetite for cryptocurrency led to it becoming the Crypto Capital of Asia, accounting for 40% of daily Bitcoin trading activity worldwide in 2017
2018 - 2021: Stricter Regulation and Falling into Obscurity
While regulation propelled Japan to prominence, it later stifled growth due to its strictness. A 2017 ruling required Japanese cryptocurrency investors to pay taxes between 15 - 55% on profits
To make matters worse, Japan suffered the largest cryptocurrency hack ever with Coincheck losing over $500M in 2018
This sparked Japanese regulators to implement some of the world’s strictest rules, including:
Requirement for cryptocurrency exchanges to register with the FSA, imposing stringent cybersecurity and AML/CFT requirements.
Mandatory separation of customer funds from exchanges' cash flows. To hold an equal amount of the same kind of crypto asset if customer funds’ had to be held in “hot wallets”
Limitation on leverage trading to a maximum of 4x
While existing even before stricter regulations were in place, crypto companies that issued or received crypto assets were also subjected to a 30% tax rate, even on net unrealized gains. All the strict regulations made it tough for projects to operate and they began to set up base elsewhere e.g Astar to Singapore
Consumer interest also starting falling; a 2020 survey found that only 4% of Japanese residents used or owned cryptocurrencies, whereas China, India and Vietnam reported 7%, 9% and 21%, respectively
2022 – 2023: Prudency paid off, full steam ahead
But, Japan’ strict regulations turned out to be a lifesaver, as they helped Japanese users avoid the effects of the FTX implosion whereas the rest of the world was impacted
While there’s a global clampdown on crypto, Japanese regulators are pushing ahead with its support of Web 3:
April 2022: Japan’s ruling Liberal Democratic Party released NFT White Paper, titled “Japan’s NFT Strategy for the Web 3.0 Era”
June 2022: One of the first major economies to introduce a legal framework around stablecoins
Dec 2022: Released interim proposal on Web 3 policy, and simplified screening process for listing digital tokens
April 2023: The Liberal Democratic Party published whitepaper laying out recommendations for boosting the crypto industry in the country, and started piloting their CBDC program
June 2023: Japan’s National Tax Agency announces that token issuers in Japan no longer have to pay 30% corporate tax on unrealized cryptocurrency gains, plus new bill around stablecoins came into effect
July 2023: Prime Minister Fumio Kishida signals plans to continue the environment for Web 3, and reiterated by Web 3 is “part of the new form of capitalism” at the WebX conference in Tokyo
Reflecting on Japan's cryptocurrency history is akin to observing a well-navigated journey through a storm; starting as the home to the world’s largest Bitcoin exchange, weathering the tempest of large-scale hacks and stringent regulations, and learning critical lessons along the way. These experiences, though marked by significant challenges, have served as the bedrock for the nation's current crypto landscape. Now, as Japan emerges as a phoenix rising from the ashes of its past, it is not merely catching up — it is preparing to lead
Reclaiming Spot as Crypto Capital of Asia
In the fast-evolving digital landscape of Web 3, few nations stand poised to harness its transformative power as seamlessly as Japan. The nation finds itself in a unique position, propelled by three pivotal forces: unwavering government support, a cultural and behavioral product-market fit among its populace, and the active interest of corporate behemoths. Together, these factors craft a synergy that makes Japan a formidable contender in the global Web 3 arena.
Government Support
Japan's ambition to position itself at the forefront of the Web 3 revolution is both evident and deliberate. Recognizing the immense economic value and transformative potential of the blockchain, the Japanese government is honing its strategic focus on sectors where the nation already excels, such as content creation, gaming, arts, and sports.
This determination transcends mere words; Japan's actions have carved a pathway to foster a flourishing environment for homegrown Web 3 entities. One of the most significant gestures in this direction has been the removal of the 30% tax on unrealized income for token issuers, and regulatory clarity that stablecoins must be pegged to the Yen or another legal tender, and may only be issued by licensed financial institutions, such as registered banks, money transfer agents and trust companies - which underscores the government's commitment to nurturing the local Web 3 industry
Japan’s strength is in its regulatory clarity. While nations like the US grapple with cryptocurrency classifications, Japan's stance since 2017 is clear: BTC and ETH are “crypto assets” under the Payment Service Act, distinct from securities and traditional currency. However, tokens akin to shares or bonds may still be classified as security tokens. In the NFT sector, Japan clarifies that unless granting holders a share in profits or dividends, they aren't securities. Yet, the broader classification of NFTs as crypto assets remains under exploration.
Japan's regulatory framework also stands out for its efficiency. Unlike the US, with multiple regulators, Japan has one: the Financial Services Agency (FSA). This streamlined approach facilitates quicker decisions. Notably, Japan's politicians have also adopted a proactive role in Web3 policy formulation, veering away from the traditionally bureaucratic and elongated pathways
Lastly, Japan's recent whitepaper is also a testament to the nation's holistic vision. It laid out concerns and actionable recommendations on critical issues to be resolved moving forward, such as:
NFTS: Request for regulatory clarity and support on intellectual property rights, consumer protection, and revenue distribution models
DAOs: While LLCs are identified as a compatible legal entity for DAOs, adjustments in existing laws are necessary to offer more flexibility for DAOs simultaneously allowing diverse token issuance and legal form
Personal Income Tax: Reduction to 20% tax rate on crypto asset gains and losses, permit loss carryforwards for three years, apply consistent taxation to crypto derivatives, and advocate taxing only when crypto assets are converted to legal tender, not during exchanges
Corporate Tax: Exclude certain tokens not held for short-term trading purposes from year-end fair value assessment taxation claims to facilitate fundraising in tokens
User Behaviour & Cultural Fit (PMF)
Love for collectibles
Japan's love for collectibles is clear in its market statistics and cultural practices. In 2021, the country's toy market was valued at around 10 billion USD. While it is comparatively smaller than China in terms of sheer size, Japan has the 2nd largest per capita toy market - almost 2x that of China.
Furthermore, despite an overall shrinking amusement sector, crane games and other prize-winning games have grown, accounting for nearly 60% of arcade revenues in 2020. This penchant for collecting is also seen in the widespread practice of stamping stations across thousands of train locations. These demonstrate that the habit of collecting items - whether toys, game prizes, or stamps - is a significant aspect of Japanese culture and consumer behavior
Familiarity with digital assets
Naturally, Japanese users also have a strong propensity towards collecting digital assets, exemplified by the size of Japan’s mobile games market, ranking 2nd globally in 2022. Even more impressively, on a per capita basis, the Japanese spend more on mobile games than any other nation.
This welcoming stance towards digital assets can be traced back to early technological and pop culture introductions. For instance, Japan introduced the IC Card in 2001, a contactless smart card predominantly used for public transport payments, which is Japan’s primary mode of transport. Moreover, Japanese pop culture has long embraced digital universes and assets, from trading Pokémon through a physical link cable in the late 1990s to clear game achievements, to equally iconic digital companions like Digimon and Tamagotchis. This embrace of the digital continued into the 2010s, with animation series like Sword Art Online further blurring the lines between virtual and tangible worlds
Strong Corporate Interest in Web 3
Japan's leading corporations have actively embraced Web 3, a move that is essential for its widespread adoption. Such corporate involvement demystifies Web 3 for the general public, assuring them of its viability while concurrently introducing their extensive user bases to the technology. Here are some significant recent adoptions:
NTT Docomo's Strategic Investment in Web 3: Japan’s premier mobile network, NTT Docomo, in November 2022, committed to an investment of up to US$4 billion in Web 3 infrastructure. This venture will see them joining forces with Astar Foundation, the brains behind the Astar Network public blockchain, and consulting giant Accenture, aiming to expedite the adoption of Web 3 in Japan
Collaborative Creation of the "Japanese Metaverse Economic Zone": A coalition of influential Japanese firms, including IT heavyweight Fujitsu, automobile titan Mitsubishi, and global banking institution Mizuho, is pioneering the creation of the "Japanese Metaverse Economic Zone". Known as Ryugukoku, this initiative will act as a digital nexus, connecting users to diverse Web3 services from both domestic and international companies and governmental entities.
All Nippon Airways's Foray into NFTs and the Metaverse: Japan's top airline conglomerate, All Nippon Airways (ANA), has unveiled an NFT marketplace on the Ethereum blockchain, showcasing aviation-centric photography and digital collectibles. Furthermore, ANA is developing a unique metaverse travel venture named "ANA Gran Whale", designed to integrate passenger flight records directly into their digital avatars.
MUFG's Pioneering Stablecoin Platform: Mitsubishi UFG Financial Group (MUFG), one of the globe's foremost financial conglomerates, revealed its "Progmat Coin" platform on June 2nd, 2023. This state-of-the-art platform is set to be employed by Japanese banks for the launch of stablecoins pegged to the Japanese Yen.
Japan stands as a beacon in the burgeoning Web 3.0 landscape, thanks to the convergence of decisive government action, a cultural predilection for digital and physical collectibles, and robust corporate engagement. This potent trifecta not only sets the stage for Japan to solidify its place at the vanguard of the Web 3.0 revolution, but also serves as a fertile ground for innovative projects that are poised to reshape the digital landscape in Japan and beyond
Mass Adoption, but Different
Perhaps some readers have already noticed the absence of commentary on the Japanese Web 3 entrepreneurial scene. As it stands, there are simply not that many projects in this space at the moment or little that have made it into the global scene.
In the final segment of this article, I will attempt to offer some perspectives on why this might be the case, and explore how mass adoption of Web 3 in Japan might unfold differently compared to other countries. I must add a disclaimer here: I haven't conducted extensive interviews with Japanese Web 3 professionals and I don't claim to be an expert. I am merely sharing observations based on my research
Historically Weak Entrepreneurial Scene Compounded by Tough Regulations
Historically, Japan has had a relatively weaker entrepreneurial ecosystem. For instance, in 2013, Japan-based startups raised an estimated amount of $625 million, while startups in New York alone raised $2.9 billion—nearly five times more in the same year. According to the 2019 Global Entrepreneurship Monitor, Japan ranked third lowest among 50 surveyed countries in terms of total early-stage entrepreneurial activity.
Adding to this, the stringent regulations imposed on Web 3 startups after 2018 have further complicated the situation. These regulatory hurdles have forced many passionate Web 3 entrepreneurs to set up bases outside of Japan. Consequently, the general consensus is that Japan’s local grassroots Web 3 scene is often perceived as "lagging" behind that of other countries
A Top-Down Approach, Contrasting the Bottom-Up Trend Elsewhere
Japan’s Web 3 scene increasingly seems to lean towards a top-down model, with corporate adoption of Web 3 technologies taking the lead. Large Japanese corporations appear to be championing the integration of these technologies, positioning themselves as the pivotal drivers propelling the country toward broad Web 3 adoption
This approach stands in stark contrast to the model observed in countries like the United States, where the adoption of Web 3 technologies has primarily been a bottom-up movement. In the U.S., it is generally the smaller startups and individual entrepreneurs who are pioneering these technologies, while large corporations tend to approach with caution, typically testing the waters before making substantial investments
That being said, it is important not to overlook the potential of Japan’s grassroots Web 3 community. Though currently less prominent, the landscape for Web 3 entrepreneurs in Japan is showing signs of improvement. This positive shift is due, in part, to the Japanese government’s pledge of close to $7 billion to support Japan’s startup scene in general beginning in 2022 and commitment to making it more conducive for Web 3 startups as demonstrated in their recent whitepaper that we’ve discussed above
Areas I’m Most Excited About
In the fast-growing world of Web 3.0 in Japan, the intellectual property (IP) business stands out as a particularly enticing area for investment, thanks to the country's robust content industry. Japan is renowned for its rich and globally influential pop culture, encompassing anime, manga, video games, and film—industries that thrive on unique and valuable IP. As Web 3 technologies facilitate new ways to manage and monetize digital assets, they could potentially revolutionize how Japanese creators protect, license, and profit from their IPs, offering a lucrative opportunity for investors.
Additionally, the Metaverse—a virtual, interconnected, and immersive digital space—represents another intriguing frontier for Japan. The Japanese public, with their strong tradition of embracing both digital innovation and intricate virtual worlds (as evidenced by their deep-rooted gaming culture), seem an ideal fit for the Metaverse. This synergy suggests that Japanese developers and entrepreneurs could play a leading role in shaping and populating this new digital realm, thereby establishing Japan as a major player in the burgeoning Metaverse economy
Continuing from the rich opportunities present in Japan's intellectual property business and its natural alignment with the Metaverse, projects building in these relevant verticals should undoubtedly consider Japan as a priority market for expansion.
If you’re working on a project in Japan, or looking to expand into Japan, please reach out to me! I would love to assist you
Projects to Keep an Eye On
Below I compiled some Japanese projects that readers should check out. Note that this list is not exhaustive – feel free to DM me or leave comments on projects that I’ve missed!
Japan-based/Japan-focused Projects
Leading smart contract hub on Polkadot founded by Sota Watanabe
Strong presence in the Japanese market, and supports both EVM and WASM environments with interoperability between them
According to Astar, they have $52M TVL staked across dApps, and $215M ASTR or 80% of ASTR circulating supply staked to secure the network
ASTR is currently trading at $270M market cap and $481M FDV
EVM-compatible, PoS blockchain with a focus on games
Oasys has a “Layer 1” known as the Hub Layer which secures the entire Oasys network. dApps are built on “Optimistic Rollups” known as the Verse Layer
According to Oasys, they have 3.1B OAS/~$164M OAS or 31% of OAS total supply staked to secure the network
OAS is currently trading at $46M market cap and $526M FDV
XANA:
EVM-based L1 blockchain with its own metaverse application
XANA has partnered with the Koto local government to host a Tokyo 2020 Olympic Games exhibition. Japan's top TV producer, Fuji Group, purchased virtual land in XANA for mixed-media content creation. Additionally, XANA aided in launching Astro Boy's NFT series in collaboration with the Japanese regional government.
XANA is currently trading at $17M market cap and $70M FDV
Web 3 game developing studio that previously released Brave Frontier, popular mobile game with 38 million downloads
Currently developing My Crypto Heros, Brave Frontier Heroes and My Crypto Saga
Also has B2B solutions such as NFT Plus to help game developers and businesses that want to launch blockchain games and NFTs, and an NFT management software for enterprises known as N-Suite
Making their foray into Japan:
dYdX: One of the largest decentralized exchanges. Has a dedicated Twitter account and community for Japan since March 2022
Axie Infinity: One of the largest Web 3 games. Has a dedicated Twitter account for Japanese community since April 2022, and the AXS token was first listed in Japanese exchange Bitbank on 7th Dec 2022
Binance: While rival exchanges Coinbase and Kraken withdrew from Japan in recent months, citing “market conditions” as the reason, Binance (the largest crypto exchange by trading volume) renters Japan and plans to introduce full service by August
Useful Resources
Japan’s most recent whitepaper on Web 3
Hashed’s take on Japan’s Web 3 scene
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