Japan's Bitcoin Investment: Exploring The Country's Crypto Interest

Japan has been showing an increasing interest in Bitcoin and other cryptocurrencies in recent years. The country's regulators have deemed Bitcoin an approved money type, and Japan hosts several crypto exchanges. Bitcoin's anonymous creator, Satoshi Nakamoto, is also thought to be from Japan. In 2017, Japan's Financial Services Agency officially recognised 11 companies as registered cryptocurrency exchange operators, signalling support for digital currency. In the same year, the country passed a law recognising Bitcoin as legal tender. In 2024, Japan moved closer to allowing investment funds to hold digital assets directly, with the Government Pension Investment Fund (GPIF) of Japan, the world's largest pension fund, exploring investments in illiquid assets, including Bitcoin. This shift in Japan's crypto policy has been seen as a positive step forward, with 54% of Japanese institutional investors planning to invest in crypto over the next three years.

Japan's government pension fund explores bitcoin investments

Japan's Government Pension Investment Fund Explores Bitcoin Investments

Japan's Government Pension Investment Fund (GPIF), the world's largest pension fund, is exploring the possibility of investing in Bitcoin and other illiquid assets. This move is part of the fund's initiative to diversify its investment portfolio and keep up with economic, social, and technological changes. While the fund has not indicated any immediate plans to expand its investment targets, its exploration of Bitcoin and other alternative assets underscores the growing institutional interest in Bitcoin and aligns with Japan's recent regulatory advances towards integrating digital assets into its economic framework.

The GPIF's Interest in Bitcoin

The GPIF, managing approximately $1.5 trillion in assets as of Q3 2023, has requested information on Bitcoin and other illiquid assets such as gold, farmland, and forests. This request for information is part of the fund's five-year research strategy to stay abreast of economic and social shifts and rapidly evolving technology. The fund currently holds a diverse array of assets, including domestic and international stocks and bonds, infrastructure, and real estate.

A Potential Pivot in Investment Strategy

The GPIF's exploration of Bitcoin marks a potential pivot in its investment strategy. Traditionally associated with more conservative asset classes, the fund's interest in Bitcoin and other volatile assets showcases its commitment to enhancing the sophistication and diversity of its portfolio. This shift is particularly notable given the fund's massive size and influence in the global pension fund landscape.

Regulatory Support for Crypto Investments in Japan

Japan's potential embrace of Bitcoin and other cryptocurrencies as investment vehicles is facilitated by supportive regulatory changes. In February 2024, Prime Minister Fumio Kishida's administration took steps to allow investment funds to hold digital assets directly. This proposed rule change aims to add crypto assets to the list of assets that investment limited partnerships can acquire and hold, creating a more conducive environment for venture capital firms and investment funds to engage with digital assets.

Broader Implications

The GPIF's exploration of Bitcoin and its potential inclusion in the fund's investment strategy could have far-reaching implications. As the world's largest pension fund, its decisions carry weight and could influence other countries' investment strategies. The fund's cautious and methodical approach, focusing on information gathering and understanding the risks and benefits, is indicative of the thoughtful consideration being given to this potential shift.

In conclusion, Japan's Government Pension Investment Fund's exploration of Bitcoin investments reflects a broader trend of institutional interest in digital assets and aligns with Japan's regulatory advances. While the fund has not committed to any immediate expansion of its investment targets, its actions signal a recognition of the growing importance of Bitcoin and other illiquid assets in the global economic landscape.

Crypto recognised as legal tender

Japan is showing increasing support for digital currencies. In April 2017, it passed a law recognising Bitcoin as legal tender. This decision was made at a time when China was turning its back on virtual currencies, banning initial coin offerings (ICOs) and causing the price of Bitcoin to fall sharply.

Japan's Financial Services Agency (FSA) officially recognised 11 companies as registered cryptocurrency exchange operators. This registration requires companies to build a strong computer system and check the identity of users to prevent money laundering. These regulations are intended to protect investors from fraud and other abuse, while supporting financial technology innovation.

In February 2024, Japan moved closer to allowing venture capital firms and other investment funds to hold digital assets directly. The cabinet of Prime Minister Fumio Kishida approved the text of a bill that seeks to partially amend the country's industrial competitiveness enhancement act. The bill states that "measures will be taken to add cryptoassets to the list of assets that can be acquired and held by investment limited partnerships".

In March 2024, Japan's Government Pension Investment Fund (GPIF), the world's largest pension fund, said it was requesting information on "illiquid assets" such as Bitcoin as part of research into potential new investments. There is no indication that GPIF will invest in Bitcoin or other cryptocurrencies. However, this statement came just days after Bitcoin hit an all-time high, and after the cryptocurrency had rallied more than 130% over the previous year.

Japan's moves towards recognising and investing in cryptocurrencies are in stark contrast to China, which has cracked down on the market.

Crypto exchange operators registered

In the Philippines, the central bank, Bangko Sentral ng Pilipinas (BSP), has registered 11 cryptocurrency exchanges, allowing them to operate in the country. These include Betur Inc. dba Coins.ph, Rebittance Inc., and Bloomsolutions Inc. The BSP has adopted a formal regulatory approach to cryptocurrency, requiring exchanges to implement safeguards against risks such as money laundering, terrorist financing, and technology management.

Additionally, 37 other crypto exchange operators in the Philippines are licensed by the government-owned Cagayan Economic Zone Authority (CEZA). CEZA offers incentives for foreign companies to register their businesses in the Cagayan Special Economic Zone and Freeport, providing a "sandbox" for the development of disruptive technologies.

Crypto ETFs

There are different types of crypto ETFs, including single-asset, multi-asset, and industry ETFs. Single-asset crypto ETFs focus on one type of cryptocurrency, such as Bitcoin, and provide direct exposure to its price movements. Multi-asset crypto ETFs, on the other hand, invest in various digital assets, spreading the risk across different cryptocurrencies. Industry ETFs focus on companies operating in the crypto industry, such as centralised crypto exchange providers or Bitcoin mining operators.

When it comes to investing in crypto ETFs, there are benefits and drawbacks to consider. On the one hand, crypto ETFs provide exposure to cryptocurrencies without the additional expenses and risks associated with owning and storing digital assets. They also lower the learning curve for investors who are unfamiliar with the technological aspects of cryptocurrencies. Additionally, crypto ETFs offer more security for investors, as they are subject to regulatory scrutiny and compliance standards.

However, one of the limitations of crypto ETFs is the potential for tracking errors, where the performance of the ETF may not directly match the current value of the underlying cryptocurrency. Regulatory uncertainty and market liquidity can also impact the performance of crypto ETFs. It is important to note that crypto ETFs are subject to the volatility of the crypto markets, and investors do not have direct ownership or control over the underlying cryptocurrency.

In terms of Japan's interest in Bitcoin, the country has been recognised as a powerhouse in the bitcoin market, especially as China has cracked down on virtual currencies. Japan officially recognised bitcoin as legal tender in 2017 and has since taken steps to allow investment funds to hold cryptocurrencies. The Government Pension Investment Fund of Japan, the world's largest pension fund, has also explored bitcoin as a potential investment, contributing to the growing interest in bitcoin exchange-traded funds.

Crypto taxation

Japan's National Tax Agency has implemented a taxation framework for cryptocurrency investors, treating crypto gains as "miscellaneous income". This classification results in higher tax rates compared to stock market investments, with some investors facing tax rates of up to 55% on their crypto profits.

The tax obligations arise in the following scenarios:

• Selling cryptocurrency for fiat currency: Regardless of whether the funds remain in a brokerage or exchange account, if you sell your cryptocurrency for fiat currency (e.g. Japanese yen or US dollars) and realise a larger cash amount than your initial investment, this is a taxable event that must be reported to the Japanese tax office.
• Exchanging cryptocurrency for another type of coin/token: If you sell your current cryptocurrency and buy a different one, or directly exchange it for another type, and your holdings have increased in value, you have realised a capital gain and must pay tax on this profit.
• Receiving cryptocurrency: This includes receiving cryptocurrency as payment for goods or services, payouts from crypto casinos, mining proceeds, or crypto dividends.

It is important to note that the laws and regulations regarding crypto taxation in Japan are still evolving, and the information provided here may not be exhaustive. It is always advisable to consult with a financial adviser or tax expert to ensure compliance with the latest regulations.

Additionally, Japan has taken steps to recognise and support the use of digital currencies. In April 2017, Japan passed a law recognising bitcoin as legal tender, and in February 2024, the government proposed a law to allow investment funds to hold digital assets directly. These moves have solidified Japan's position as a driving force in the bitcoin market, particularly as China has implemented stricter regulations on cryptocurrency.

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