Recently, I visited the “Flying Car Station” at the Osaka Kansai Expo and experienced the flying car exhibits. (Reference: https://www.expo2025.or.jp/future-index/smart-mobility/advanced-air-mobility / )
Figure1: A realistic flying car
While the pavilion is open to visitors without reservations, those who make a reservation in advance can board a parked flying car and experience a video of the car flying like a taxi from Yumeshima to Mount Koya or Awaji Island. Additionally, on certain mornings, a flight demonstration of the actual car is also held in a separate location within the venue (when I visited, in addition to the demonstration flight, there was also a Q&A session with the president of Skydrive explaining the car). Even before
the event, there were many negative comments about flying cars, such as “it doesn’t seem realistic,” “it’s a waste of tax money,” and “this isn’t a car,” but the exhibits were very easy to understand and provided a concrete image of what future society might be like. At the very least, it was an experience that made me feel like “this isn’t a dream, it could be a reality in the near future.”
Although the exhibition’s catchphrase was “There’s no traffic jam in the sky,” the reality is not so simple. Under the Aviation Act and the Drone Act, many airspaces, such as densely populated areas (DID districts), around airports, and near important facilities, are generally prohibited or severely restricted. Therefore, under the current system, “freely flyable airspace” is extremely limited, and in fact, “usable airspace” is also quite limited. Furthermore, air traffic control exists in the airspace, and traffic control by controllers is essential for the safe flight of commercial aircraft, helicopters, eVTOLs, and drones. In fact, “holds” frequently occur over Haneda Airport during peak hours, and air traffic is subject to physical and institutional limitations. In the future, the development of dedicated routes and unmanned aircraft traffic management systems (UTMs) will be essential for low-altitude operations within cities.
While the technology is becoming a reality, there are many institutional challenges to truly bring flying cars to fruition, such as airworthiness certification under the Aviation Act, operator liability, and standards for installing vertiports in urban areas.
In recent years, the Ministry of Land, Infrastructure, Transport and Tourism has been making successive revisions to government ordinances and technical standards, including the 2023 amendment to the Enforcement Regulations of the Aviation Act, the vertiport maintenance guidelines, and the publication of the Next Generation Air Mobility Operation Guidelines in 2025.
However, a fundamental system design has yet to be reached, and many areas remain legally uncertain and gray areas.
In this article, we will organize and examine flying cars by comparing them with the future visions we all imagine and science fiction works, and current laws.
This article is part of a series in which I consider future systems from the perspective of a lawyer, inspired by the exhibitions at the Osaka Expo. Previous articles: Is the Android ‘Me’ the Same Person?- Future Legal Systems Contemplated at Osaka Kansai Expo 2025 ADD LINKS EMBEDDED Who would be the judge of a murder were to to occur in an orbital elevator? |
Flying cars have long been a familiar feature in science fiction works, but their appearance varies, with each work depicting a different vision of society and technology.
In the 1985 film “Back to the Future Part II,” there is a memorable scene in which a DeLorean flies through the sky in the future of 2015. In this scene, the flying car is depicted as a personal vehicle, presenting an ideal future in which anyone can travel freely through the sky.
In the 1982 film Blade Runner, a flying car is depicted as a police vehicle, and there is a memorable scene in which it flies between skyscrapers. In this scene, the sky is not a public space, but functions as a domain controlled by power.
In the 1997 film The Fifth Element, flying cars are commonplace among civilians, urban spaces have multi-dimensional transportation systems, there are even traffic lights in the sky, and “air traffic jams” are a part of everyday life.
In the 1995 film Ghost in the Shell, a helicopter-type hovercar appears as a means of transportation for Public Security Section 9. Flying cars are not just a means of transportation but are positioned as part of the city surveillance infrastructure.
Figure2: A sci-fi flying car
What is interesting is that these works all barely address issues such as “who controls the skies” or “what legal rules govern flight.” While the
“free movement in the skies” depicted in science fiction works is appealing, but in reality, strict airspace management and aviation legislation exist. Rather, the question of “who owns the skies” is at the forefront of institutional design in modern society.
The term “flying car” catches your eye, but the aircraft currently being developed are not like the ones you might imagine in science fiction, like the DeLorean from Back to the Future Part II. They have no wheels and do not drive on roads, but the familiar term “car” is used because the aim is to provide an “everyday transportation service that anyone can reserve on demand.”
What exactly constitutes a flying car has not been finalized, but in documents from the Ministry of Land, Infrastructure, Transport and Tourism, flying cars are often defined as “electric, automated vertical take-off and landing aircraft (eVTOL)” and have the following characteristics:
These characteristics make flying cars different from conventional helicopters and drones.
Classification | Propulsion method | Control | Take-off and Landing | Main uses | Legal system |
Flying car (eVTOL) | Electric | Future automation | Vertical takeoff and landing | Intra-city transportation and aerial taxis | The application of aviation law is also currently under design |
Helicopter | Internal combustion engine | Manned pilot | Vertical takeoff and landing | Government agencies, news, and emergency services | Regulated by Aviation Law |
Drone | Electric | Unmanned (remote) | Vertical takeoff and landing | Photography, logistics, surveying | Unmanned Aerial Vehicle |
Flying cars are vehicles that are small and lightweight, like drones, and capable of vertical takeoff and landing, but also have the ability to transport people like helicopters. In that sense, they can be described as a “hybrid entity” that cannot be captured by traditional classifications.
Technically, the term eVTOL (electric Vertical Take-Off and Landing aircraft) is sometimes used, but there are currently no definitions of “flying cars” or “eVTOL” in Japan’s Aviation Act.
Also, although the word “car” is used, it is not a car, so it is not subject to the Road Transport Vehicle Act, and the automobile license and vehicle inspection systems do not apply. Conversely, because it is different from airplanes and helicopters, it does not fit completely within the framework of the existing Aviation Act.
Flying cars may still give the impression of being a futuristic vehicle, but the technology is already at a practical stage, with companies both in Japan and overseas already developing actual vehicles, conducting test flights, and conducting pre-commercial operations.
In the United States and Europe, efforts are accelerating toward the practical application of urban air mobility (UAM) based on eVTOL (electric vertical take-off and landing) aircraft.
In Japan, efforts are underway to commercialize flying cars, spurred by the Osaka-Kansai Expo.
The biggest obstacle to flying cars is not technology, but systems. As they are aircraft that fly in the air, they require a wide range of legal infrastructure, including aviation laws, aircraft manufacturing standards, safety certification, operation management, pilot qualifications, and standards for the establishment of takeoff and landing sites.
The Aviation Act encompasses conventional aviation, including fixed-wing and rotary-wing aircraft, but there is no regulatory design in place to accommodate eVTOLs, which operate frequently at low altitudes in cities, or automated/remotely piloted aircraft, leaving a gap in current legislation.
The central law that regulates Japan’s skies is the Aviation Act. However, the Aviation Act was originally designed to accommodate fixed-wing aircraft that take off from runways and fly at high altitudes, and helicopters with limited uses, creating a mismatch with low-altitude, short-distance, and frequent flying vehicles like flying cars (eVTOL). Currently, flying cars are classified as “aircraft” under the Aviation Act and require permission from the Ministry of Land, Infrastructure, Transport and Tourism, but the system has yet to catch up on the following points:
Some may wonder, “Flying in the sky means it will be regulated in the same way as drones?”
Drones are also subject to strict controls, including registration, remote ID, permits and approvals. However, the focus of the system design is on “unmanned transport of goods,” while flying cars, which “transport people with pilots,” have fundamentally different requirements and scope for type/airworthiness, crew qualifications, and airspace capacity management.
In the development of flying cars, one unavoidable issue is the question of “Who is responsible if an accident occurs?” This is a core issue that is directly linked to the construction of the entire legal system, including where responsibility lies, the licensing system, and the insurance system.
Many of the eVTOL aircraft currently being developed are intended to be autonomously or remotely piloted in the future, but in the initial stages, they are primarily intended to be piloted by humans.
If flying cars become autonomous in the future, the possible responsible parties are as follows:
For example, if an AI system makes a mistake in route selection during autonomous driving and crashes, the manufacturer, software developer, air traffic control system, and/or aircraft owner may be held liable. This is a complex issue that is fundamentally different from the driver’s liability of a car.
Let’s imagine something more concrete. If a flying car flying over Shinjuku suddenly crashes due to a system failure, causing damage to buildings and pedestrians on the ground, compensation could run into the billions or even tens of billions of yen. Would the manufacturer, the operator, or multiple parties be held responsible? There is no clear answer under the current legal system.
If flying cars become commonplace, the arteries of cities will shift from the ground to the sky. Instead of train stations, vertiports will be installed on the rooftops of high-rise buildings and shopping malls, creating a new common sense that “rooftops = entrances.” Air route nodes will also be established in large suburban facilities and hospitals, rewriting the very value map of cities.
Figure3: The rooftop will become a station
The first use for this technology is expected to be short-distance travel within cities. At a Skydrive Q&A session that I attended, it was explained that “current flight time is about 10 minutes, with the goal of 15-20 minutes in the future. The range will be 30-40km, and the fare will be 10,000-20,000 yen one way from Yumeshima to Shin-Osaka, with the ultimate goal being about three times faster and about twice the price of a taxi.
” If it’s “three times faster than a taxi, but about twice the price,” it certainly sounds appealing. As a new means of transportation unconstrained by traffic jams, it could potentially expand the possibilities of urban life.
On the other hand, in the early stages of introduction, the costs of aircraft, batteries, insurance, and takeoff and landing sites will likely increase, leading to higher fares. The number of flights will also be limited, and reservations will be required. Furthermore, surge pricing (fare increases) will occur during peak times, raising concerns that this will ultimately become a means of transportation that only the wealthy can use to buy time.
Vertiports require multiple standards, including evacuation routes and noise control. As the value of areas in front of stations weakens, urban planning to utilize rooftops as “sky station areas” becomes more realistic. We can see a future in which the rooftops of high-rise apartment buildings become departure and arrival points, changing the very structure of cities.
However, who can enjoy these benefits depends on the system’s design. If fares remain high, a new mobility gap will emerge between those who can use the air and those who cannot. Conversely, if it is incorporated into a public transportation system, it may develop into an infrastructure that allows for more equitable sharing of time. We are at a crossroads in the future, between “division” and “sharing.”
Flying cars are becoming a technological reality, but the legal system has yet to catch up. The path we can choose from can be broadly divided into three categories.
The key challenges we face are clear.
Will flying cars become “highways for the wealthy only,” or “public spaces that anyone can use”? The shape of the future will change dramatically depending on how the system is designed.
And this system will not be “decided by someone,” but will be shaped by the accumulation of consensus building across society. Just as trains and automobiles have done, flying cars may one day completely change our lives.
How would you design this future?
“If a child is born in space, what nationality does the child take on? If a murder were to occur in an orbital elevator, who is responsible? If there is a labor dispute on a space colony, which labor laws would be applied?”
At first glance, it may seem like a science fiction story, but it may be a “future reality” that is right around the corner from us. Last time, inspired by Professor Hiroshi, I wrote a blog post titled “Is the Android ‘Me’ the Same Person?” (https://innovationlaw.jp/en/android-law/)
This time, I visited the Gundam Pavilion (https://www.expo2025.or.jp/domestic-pv/bandai-namco/). Gundam is a monumental science fiction anime franchise that depicts warfare using mobile suits and humanity’s expansion into space. In this fictional world, characters fight battles in their own high-tech original suits.
The Expo Pavilion depicts a peaceful future where mobile suits are used for construction, agriculture, and space debris collection. Visitors of the Pavilion have a virtual experience of riding an orbital elevator from Yumeshima in Area 7 (Gundam terminology for Earth) to a space colony.
While experiencing this, I was thinking about the following: “In the exhibit, it takes only a short time to reach space, but in reality, it would take days. If something were to happen during that time, which laws would apply?
And to begin with, is an orbital elevator a vehicle? Or a building?
In the world of Gundam, space colonies are independent of Earth, but if they were connected to the ground, whose territory would it be?”
In my previous blog, I questioned what the law should be like in a future where the boundaries of humanity become blurred. In this article, I would like to attempt a thought experiment from a legal perspective on a future where the boundaries of space become blurred, namely, in space, regarding which country can reach whom and how.
Figure 1 Orbital Elevator and space colony (AI-generated)
Imagine a birth taking place in a space elevator. Labor begins 10,000 kilometers above Earth. The baby is born 20,000 kilometers away.
Before deciding on the child’s nationality, the first thing we need to consider is, “Where is the elevator built?” In fact, space elevators have some surprising physical constraints. Due to the geostationary orbit, they can only be built directly on the equator. In other words, they are physically impossible to build in a place like Japan. They can only be built in countries directly on the equator, such as Ecuador, Kenya, Indonesia, Brazil, and the Congo (this point is explained in the pavilion).
This is where an interesting (and complicated) structure arises.
It seems likely that the countries with the technology and funds to build a space elevator are primarily the United States, European countries, China, and Japan. However, it is the countries along the equator that have the physical space to build one. This means that there is inevitably a separation between “countries with the technology” and “countries that provide the land.”
Going back to the birth example from the beginning, if the United States had built a space elevator in Ecuador:
Table 1: Structure of space elevators and jurisdiction boundaries
A space elevator is more than just a transportation facility. As the only “gateway” connecting Earth and space, it will be an extremely important strategic infrastructure in terms of politics, economy, and security.
Because logistics and communications between Earth and space will be concentrated at this single point, the country that controls the elevator will have an overwhelming advantage in the space economy. It will also be in a position to effectively control activities in outer space.
This situation could potentially give rise to a serious international issue known as “orbital superiority” in real-world space development.
So how should equatorial countries, geographically capable of building a canal, and countries with the technology cooperate? The Panama Canal, built by the United States in Panama in the early 20th century, is often cited as an example.
At the time, the United States leased the Canal Zone from Panama for 99 years, effectively granting it sovereignty and military control. A similar model for space elevators is envisioned: they would be built and operated under a long-term lease of land and space.
However, space elevators are not simply terrestrial facilities. They would extend from the Earth’s surface to 35,000 km into outer space. This would require more than a simple terrestrial lease; a contract would also need to include access to territorial airspace, undefined airspace, and outer space. This would likely result in the most lengthy legal agreement in history.
Currently, several alternatives are being considered in legal research on space elevators.
The Japan Space Elevator Association and others have proposed building it above the sea directly under the equator, avoiding territorial disputes. However, maritime law does not anticipate use in the airspace, creating new legal challenges. Organizations such as the Japanese Society of Aeronautics and Astronautics have also proposed building and operating it through an international consortium of multiple countries. This model would operate space infrastructure through a multinational institutional design, similar to the International Space Station, while avoiding the monopoly of any single nation.
In any case, the physical constraints of where a space elevator can be built dictate who and how it can be legally operated. The technological constraints themselves are driving the design of new international institutions. In the next section, we will delve into the legal issues that arise in the “space” itself, through which this elevator will travel—that is, in airspace, outer space, and the undefined areas in between.
A murder occurred on a space elevator. The suspect was arrested, but the crime occurred 10,000 kilometers above Earth. The question that arises here is, “Whose laws apply to this space?”
In fact, there is no clear answer to this question. This is because the space elevator is designed to travel through 35,000 kilometers of space, where it is unclear whose sovereignty extends and whose territory it is.
The uniqueness of a space elevator is similar to that of a transcontinental railroad. Just as the applicable laws change whenever a railroad crosses a border, the legal jurisdiction of a space elevator also changes as it ascends.
However, there is a crucial difference. With a railroad, the laws change at the “line” of a national border, but with a space elevator, the boundaries themselves are unclear, as to which country’s laws begin and end.
With an airplane, the laws of one country apply. In contrast, while a space elevator is a single structure, its legal world changes gradually as it moves vertically, from the ground to airspace to outer space – making it an extremely unique entity never before seen.
under international law.
Sovereignty extends to the altitude at which passenger aircraft fly – roughly 10 to 12 km. As for the stratosphere and mesosphere (12 to 100 km) above that, the situation is vague, with some saying it is “probably territorial airspace.”
The 1967 Outer Space Treaty stipulates that “outer space has no sovereignty.” However, there are problems here as well.
To begin with, it has not been decided where outer space begins.
This ambiguity is a fatal problem for structures that continuously connect the ground and space, such as a space elevator.
The space elevator is a single continuous structure, but the space it travels through is:
Table 2: Scope of Laws Applicable in Outer Space (Conceptual Diagram)
Altitude range | Legal nature | Current laws that may apply |
Ground- 12km | Certain airspace | Criminal and civil laws of the country where the facility is located |
12km-50km | Actual airspace | Laws of the country where the facility is located (approximate) |
50km-100km | Undefined airspace | Unknown |
More than100km | Outer space | Outer space treaty + laws of the country where the facility is located |
In the murder example mentioned above, the 10,000 km point is clearly outer space, so the laws of the country that “registered” the elevator would likely apply. But what if it were 100 km away? This would be a crime in a “legal vacuum.”
In reality, it would be impossible to manage a space elevator by dividing it into different altitudes, such as “from here to here it is subject to Country A’s law, and from here to Country B’s law.”
One of the biggest legal challenges in building a space elevator is determining which legal framework to use to treat the entire structure under. Whether it be managed by a single country, operated by a multinational corporation, or governed by an international organization — the choice will determine the nature of this “legal gateway” to space.
In the next section, we will look at the more complex legal issues that will arise in the space colonies that lie beyond this space elevator.
Mobile suit pilots working on the construction of the outer walls of a space colony have gone on strike, demanding special allowances for dangerous work in space.
Their demands are legitimate. Construction work in space is many times more dangerous than on Earth. However, the question that arises is, “Under whose labor laws should this labor dispute be resolved?”
In fact, to answer this question, it is necessary to know “the nationality of the space colony.” However, the current system for determining the nationality of space facilities is too complex to accommodate the space colonies of the future.
Current space law has a rule known as the “country of registration principle.” The country that launched or commissioned the launch of an artificial object (satellite, spacecraft, or space station) into space becomes its “country of registration,” and that country has jurisdiction and responsibility.
This principle works relatively well for the International Space Station (ISS). Japanese law applies to the Japanese laboratory module “Kibo,” while Russian law applies to the Russian module.
However, future space colonies will not be research facilities where various countries bring their own modules. They will be one large “space city” with integrated social infrastructure, including housing, commercial facilities, hospitals, schools, and factories. The traditional simple rule of “launching country = country of registration” is no longer applicable.
The construction and operation of a space colony is expected to require an extremely complex international system.
For example, funding will come from a joint venture between the European Space Agency, NASA, JAXA, and a private investment fund, construction will be a joint venture between SpaceX (USA), Mitsubishi Heavy Industries (Japan), and Airbus (Europe), components will be launched using rockets from different countries, and final assembly will be carried out unmanned and automatically in orbit.
In this case, how will the strike by the mobile suit pilots at the beginning be handled?
Not knowing which answer is correct is a real problem.
The problem becomes even more complicated when a space colony is physically connected to Earth by a space elevator.
Conventional space facilities “float” in space. However, a colony connected to Earth can also be considered an “extension of ground facilities.” If a labor dispute occurs in a colony connected to an orbital elevator extending from Ecuador, multiple options arise: the laws of the country of registration, the laws of the country of connection, or special international agreements.
What if tens of thousands of people were to live in a space colony, have children, receive an education, work, marry, and grow old there?
What would their “nationality” be?
Gundam depicts a division between “spacenoids,” born in space, and “earthnoids,” born on Earth. While it is fiction, how to handle citizenship, voting rights, and social security for people who were actually born and raised in a colony will be a realistic challenge in designing a system.
Who will protect the rights of space workers? This question will eventually develop into the more fundamental question of “who will protect the rights of space citizens?”
Column: Who will defend the colony if it is attacked? |
When considering the legal status of space colonies, military and security issues are unavoidable. If a space colony were to be attacked by cyberattack or physical attack, which country would bear responsibility for its defense? Under the current system: Institutional Design Needed |
Column: Do AI pilots have human rights? (Thought column) |
At the Gundam Pavilion at the Expo, an AI replicating the thoughts and personality of a famous pilot will be featured. A mobile suit appears in a desperate scene, and the AI pilot rescues the audience. Here, I’d like to ask a question: does this AI have personality or human rights? AI learns from past words and actions and imitates “typical” behavior. However, this is not the person themselves; it is merely software replicating their “personality.” Under the current legal system, AI is not recognized as having personality or human rights. It is not held responsible and is treated merely as property. However, in the future, when AI with self-awareness and the ability to make decisions appears, and it is able to, for example, save lives in outer space and choose to “sacrifice itself,” can we still call it “merely a tool”? AI pilots can operate in harsh environments such as radiation and vacuums, and have the potential to become even more important partners than humans. What if such an AI were to save someone, choose someone, and sacrifice itself? Would it be just a machine, or “someone”? It may be that law and ethics in the future will no longer be able to turn a blind eye to this question. |
The future space infrastructure we saw at the Gundam Pavilion at the Expo is by no means science fiction. Orbital elevators are expected to become a reality in the 2050s, and space colonies may become a reality within this century.
However, neither orbital elevators nor space colonies were within the imagination of the 1967 Outer Space Treaty’s framers. Geopolitical inequalities due to physical constraints, ambiguity in the scope of sovereignty, and complex relationships of responsibility—all of these are the result of technological progress outpacing existing legal systems.
For Japan to take the lead in creating legal rules for space development, it is time to make legal preparations before the future we saw at the Expo becomes a reality.
References
Generative AI refers to artificial intelligence that can automatically generate a variety of content, including images, text, audio, program code, and structured data.
Learning models that have learned large amounts of data through machine learning can easily generate images, music, text, and other content that resembles human creation.
From around 2022, image generation AI such as Midjourney and Stable Diffusion began to rapidly spread in the market, and from early 2023, generative AI specialized in natural language processing, such as ChatGPT and Bing, began to rapidly spread1
Examples of generative AI products include:
Product name | Field | Product description |
Midjourney, Stable diffusion, DALL・E etc | Image generation | AI that generates realistic/ artistic images based on text instructions |
Artbreeder | Image generation | AI that generates new images from uploaded images or multiple images |
Juke deck | Music generation | AI that generates original, copyright-free music by specifying genre, tempo, mood, etc. |
Runway ML | Video generation | AI that can create videos by typing text |
ChatGPT. Bing | Text generation | AI that responds in natural language to text input in natural language. Conversational agents, automated speech, machine translation, etc. |
Catchy | Text generation | AI text creation tool specialized for Japanese |
This article was also created using text generation AI such as ChatGPT. Specifically, we asked ChatGPT questions such as, “I’m thinking of writing a blog about financial institutions and generative AI. Please tell me the outline,” and “Please give me some examples of generative AI products in table format,” and then the output data was ① checked by a human, ② reconstructed by a human, ③ corrected by a human, and ④ added to by a human to finish it.
The data generated by text generation AI still contains many errors and cannot be used as is at present.
Currently, significant corrections and additions are made to the AI output data (i.e., it is not yet enough to eliminate human work), but even now it leads to a considerable improvement in work efficiency, and it is expected that it will become even faster and more accurate in the future.
With the rapid evolution of generative AI, many financial institutions are exploring the possibility of using AI to improve operational efficiency.
For example, financial institutions generally create a huge number of documents both for customers and internally. If generative AI can be used to streamline both customer and internal operations, such as creating explanatory documents and approval documents, it could lead to significant cost reductions. Furthermore, it could provide new services for customers, such as AI-based investment advisory services and automated portfolio optimization tools, and act as a sounding board for internal discussions.2 It is also possible to use the answers from the chat AI as a reference to reconsider business decisions and organize your thoughts.
Applications of generative AI in the financial sector: (1) Improving customer experience and marketing; (2) Improving efficiency in customer-facing operations (3) Improving efficiency in internal operations (4) Investment advice and portfolio optimization (5) Risk assessment and fraud detection (6) Supporting discussions |
On the other hand, the use of generative AI may give rise to new ethical and legal issues, such as the following:
AI and the Emergence of New Problems (1) Bias Issues: In various types of screening, if the data used to train generative AI is biased toward a particular race or region, the AI may output biased results. This could lead to racial or regional discrimination. (2) Privacy Issues: If financial services or products using generative AI require customer personal information, privacy concerns arise. Privacy must also be protected when using information generated by AI. (3) Fraud Issues: Generative AI may be misused for sophisticated fraudulent activities. Examples include fraudulent transactions and phishing to steal personal information. (4) Human Relationship Issues: As generative AI advances in automation, human labor and expertise may become less necessary. This could lead to job fluidity and unemployment. Furthermore, if AI decisions exceed human judgment, humans may become subordinate to AI, potentially shifting decision-making authority from humans to AI. |
As mentioned above, when it comes to generative AI and the financial sector, careful consideration is needed not only of technical issues, but also of ethical and legal issues and their relationship with humans.
Currently, the area in which financial institutions are most considering using AI is to improve operational efficiency.
From what we have heard, financial institutions have been contacting major AI companies in large numbers to ask about the use of AI and how to improve operational efficiency, and new developments are expected to take several months to complete.
For example, 1) AI can be used to streamline the creation of large volumes of documents, such as explanatory materials for customers, contracts, internal approval documents and various records, and applications and reports for regulatory authorities. 2) Chat AI can be used to automatically respond to customer inquiries (in text and audio), collect, record, and digitize the content of inquiries. 3) Large volumes of fictitious transaction data can be created to detect customer fraud.3 ④ Possible actions include using AI to analyze information such as the borrower’s past borrowing history and conducting loan screening.
One feature of AI use in financial institutions is that they do not use open databases like ChatGPT, but rather use dedicated databases that add their own company’s own data to such open databases (using machine learning, etc.).
Using such dedicated databases has the advantage of providing answers that are more relevant to the business and ensuring confidentiality of business operations.
In order for generative AI to perform machine learning, it is necessary to feed the AI various types of data from your company (i.e. provide the AI with information, analyze it, and have it learn).
There are two possible options: either consuming the data in-house or providing the information to an external vendor to consume the data, but the data that financial institutions want to consume contains a lot of personal and confidential information, which raises issues regarding the Personal Information Protection Act and confidentiality obligations.
Our current conclusions seem to be as follows, and we will consider each of them.
In-house data use | Use of vendors for each part | |
When using personal customer information, the privacy policy states the purpose of use, such as “for research and development of new products and services through data analysis, etc.” | It is within the scope of the purpose of use and possible | It is within the scope of the intended use, and confidentiality agreements must be concluded with possible third-party vendors. |
When using personal customer information, the privacy policy simply states the purpose of use as “to improve services to customers” | This may be controversial, but it should be handled carefully. It is advisable to revise the privacy policy. | Same as left |
No special confidentiality agreements have been signed regarding the use of corporate customer information | The relationship with the obligation of confidentiality that naturally accrues becomes an issue, but in principle, it is thought that there should be no problem. | There should be no problem if you sign a non-disclosure agreement with a third-party vendor. |
We have signed special confidentiality agreements regarding the use of information from individual or corporate customers. | Depends on the content of the explicit confidentiality agreement, but contractually it is usually difficult | Same as left |
① Personal Information Protection Act and Purpose of Use
When processing data in-house, the question arises as to whether the processing is within the scope of the purpose of use. The Personal Information Protection Act requires that when handling personal information, the purpose of use must be specified as much as possible (Article 17, Paragraph 1 of the Personal Information Protection Act). 4 Unless the consent of the individual is obtained, personal information cannot be handled beyond the scope necessary to achieve the specified purpose of use (Article 18, Paragraph 1 of the same Act). Furthermore, when personal information is acquired, unless the purpose of use has been publicly announced in advance, the individual must be promptly notified of or publicly announced the purpose of use (Article 21, Paragraph 1 of the same Act).
If the use of AI falls outside the scope of the previously set purpose of use, the purpose of use must be changed. If the use of AI falls within a scope that can be reasonably deemed to be related to the previously set purpose of use, it is sufficient to notify the individual or make it public (Article 21, Paragraph 3 of the same Act). On the other hand, if the change goes beyond the permitted reasonable scope, the purpose of use must be set again after obtaining the individual’s consent for use with AI.
In addition, if the consent of the individual is required when revising the privacy policy as described above, the provision on the procedure for changing standard terms and conditions under the Civil Code (Article 548-4 of the Civil Code), which allows standard terms and conditions to be changed without consent in certain cases, is not considered to apply.5 Therefore, in the case of online transactions, it is likely that procedures will be implemented such as clearly indicating the changes to the privacy policy in a pop-up window or similar and obtaining customer consent by clicking on the button.
② Specific examples of descriptions of the purpose of use in a privacy policy
For example, consider a case where a privacy policy simply states “to improve service to customers” and various personal information is used to improve the efficiency of customer-related operations. Even in such a case, it may be argued that “to improve service to customers” falls within the scope of the purpose of use, but from the customer’s perspective, it would be unthinkable that their personal information would be used not just to provide service to themselves, but to improve service to customers in general (to improve business efficiency), and if so, it would be argued that this is an insufficient specification of the purpose of use and that the purpose of use should be changed.
Next, consider the case where a privacy policy stipulates “for the research and development of financial products and services through market research and data analysis,” and various personal information is used to improve the efficiency of customer-facing operations. In this case, although it is not explicitly stated that the analysis is performed using AI, it is reasonable to expect that some kind of data analysis will be performed using large amounts of customer personal information, and that the results will be used to research and develop financial products and services. Therefore, it is generally safe to assume that use with AI also falls within the scope of the privacy policy’s intended use.
In any case, you will need to consider the specific wording of the privacy policy and the purpose of use, and consult with your legal department.
① Personal Information Protection Act and Third-Party Provision
When providing personal information to other companies, such as vendors, to feed it to AI, in addition to the above, the question of whether or not this falls within the scope of third-party provision arises.
In principle, when providing personal data to a third party, a personal information handling business operator must obtain the consent of the individual (Article 27, Paragraph 1 of the Personal Information Protection Act).
However, if a business operator outsources all or part of the handling of personal data to a third party within the scope necessary to achieve the purpose of use, such outsourcing party will not be considered a “third party,” and the individual’s consent will not be required (Article 27, Paragraph 5, Item 1 of the Act). Therefore, if a business operator outsources the task of feeding personal information to an AI in order to build an AI service it provides, and the individual’s consent is therefore not required. However, the outsourcer must provide necessary and appropriate supervision of the outsourcing party to ensure the safe management of personal data (Article 25 of the Act).
Furthermore, even when providing personal data to a specific person for joint use, the consent of the individual is not required if the individual is notified in advance of the joint use and certain information stipulated by the Personal Information Protection Act, such as the items of personal data, or if the individual is made readily available (Article 27, Paragraph 5, Item 3 of the Act). For example, joint use may occur when AI that uses personal data is used between group companies.
② Specific examples of providing personal data to vendors as part of outsourcing:
As a specific example of outsourcing that does not constitute third-party provision, for example, if the purpose of use in a privacy policy is clearly stated as “for the research and development of financial products and services through market research and data analysis, etc.”, providing personal data to a third-party external vendor for analysis using AI could also be interpreted as “in connection with a business outsourcing all or part of the handling of personal data to the extent necessary to achieve the purpose of use.”
③ Conclusion of a confidentiality agreement
Even if the Act on the Protection of Personal Information allows for the provision of personal data to a third party, it states that “the trustor must exercise necessary and appropriate supervision over the trustee to ensure the safe management of personal data (Article 25 of the Act),” so naturally a contract imposing a confidentiality obligation on the third-party vendor will be necessary.
Even if the purpose of using the acquired personal information does not include analysis using AI, by processing the personal information to be fed to AI into anonymous processed information, it can be used for purposes other than those intended or provided to third parties without the consent of the individual.
Here, anonymously processed information means “information about an individual obtained by processing personal information in a certain way so that a specific individual cannot be identified, and the personal information cannot be restored” (Article 2, Paragraph 6 of the Act). However, when personal information is processed into anonymously processed information, processing must be carried out in accordance with standards set forth in the rules of the Personal Information Protection Commission (Article 43, Paragraph 1 of the Act, Article 34 of the Enforcement Regulations of the Personal Information Protection Act), such as deleting all or part of descriptions contained in the personal information that can identify a specific individual, deleting all personal identification codes, deleting codes that link personal information with processed personal information, and deleting peculiar descriptions, and it is thought that processing is often difficult.
Therefore, it may be possible to use pseudonymized information, which does not require more advanced processing technology than anonymously processed information. Pseudonymized information refers to “information about an individual obtained by processing personal information in a manner that makes it impossible to identify a specific individual without comparing it with other information” (Article 2, Paragraph 5 of the Act on the Protection of Personal Information). Because pseudonymized information is less abstract than anonymously processed information, it has the advantage of maintaining the usefulness of personal information. Furthermore, unlike unprocessed personal information, it is possible to change the purpose of use beyond a scope that is reasonably recognized as being related to the previous purpose of use (Article 41, Paragraph 9 of the Act). However, unlike anonymously processed information, provision of pseudonymized information to third parties is prohibited in principle (Article 41, Paragraph 6 of the Act).
Raw personal information | Pseudonymized information | Anonymously processed information | |
Processing | No processing | Processed so that a specific individual cannot be identified unless compared with other information | Processing to make it impossible to identify a specific individual and to restore personal information |
Use for other purposes | It can be used within the scope of the specified purpose of use. In addition, it is not possible to change the purpose of use beyond the scope that is reasonably recognized as being related to the purpose of use before the change. |
It can be used within the scope of the specified purpose of use. However, it is possible to change the purpose of use beyond the scope that is reasonably recognized as being related to the purpose of use before the change. |
Unintended use is possible |
Provided by a third party | In principle, consent from the individual is required | This is not permitted except as provided for by law (even if the individual’s consent was obtained before the pseudonymized information was created). In addition, the provision that does not apply to outsourced work (Article 28, Paragraph 5 of the Act) applies. | In principle, the individual’s consent is not required |
Financial institutions naturally have confidentiality obligations with their clients and other parties who provide them with information, and may also enter into confidentiality agreements that stipulate special confidentiality obligations when conducting special transactions such as M&A advice or securities underwriting. When using AI to analyze information, it is necessary to consider not only the relationship with the Personal Information Protection Act but also the relationship with such confidentiality obligations.
With regard to personal information obtained without entering into a contract containing special confidentiality clauses, there is generally no argument that it naturally requires a confidentiality obligation greater than that stipulated in the Personal Information Protection Act. Therefore, I believe that there should be no problem with either in-house use or provision to a third party as long as it is carried out within the scope of the Personal Information Protection Act as discussed previously.
Regarding information on corporations acquired without entering into a contract containing a special confidentiality clause (for example, a corporation conducting transactions based on a normal banking transaction agreement), there is generally no argument that the confidentiality obligation towards a corporation is heavier than the confidentiality obligation towards an individual, so there will likely be no problem if the information is used within the company or provided to a third party within the same scope as for an individual.
When financial institutions enter into special confidentiality agreements for M&A, IPO advice, securities underwriting, or other special contracts, many of these agreements contain clauses such as (1) not to use the information for purposes other than the IPO, and (2) not to disclose the information to third parties unrelated to the IPO. If such confidentiality agreements exist, it may be difficult to feed data to AI or provide the data to third-party vendors for purposes such as using generative AI to simplify the creation of materials for future IPO projects.
Regarding legal tech, for example, there is a debate as to whether uploading a contract file to a legal tech service for risk analysis constitutes disclosure of the contract to a third party, and if the contract stipulates a confidentiality obligation, does this constitute a breach of contract? Although there are arguments that this is in fact an implicit consent of the contracting party, and that since there is no actual damage, it is a matter of business judgment, etc.6 the situation discussed in this section is far more related to actual cases than legal tech cases, and implied consent requires more careful consideration. Furthermore, the argument that there is no actual harm is likely to be made more carefully in the case of financial institutions, which are forced to be more cautious about compliance risks than general business companies.
At present, there may not be much need to feed AI large amounts of documents from parties that have confidentiality agreements, but considering that such needs may arise in the future, it may be necessary to consider the content of the confidentiality agreement templates that your company prepares.
Legally, in order to engage in investment advisory and agency business, registration as a financial instruments business operator is required (Article 28, Paragraphs 3 and 29 of the Financial Instruments and Exchange Act).
According to Article 2, Paragraph 8, Item 11 of the Financial Instruments and Exchange Act, investment advice regarding financial instruments requires the following: 1) an agreement to provide advice verbally, in writing (with certain exceptions), or by other means regarding investment decisions based on an analysis of the value of financial instruments (meaning decisions regarding the type, brand, number, and price of securities to be invested in, as well as the choice, method, and timing of buying and selling, or decisions regarding the content and timing of derivative transactions to be conducted), and 3) the other party agreeing to pay a fee.
For example, if a generative AI is fed with information such as the past price movements, returns, and investment data of financial products, and as a result, it creates a text recommending an investment stock, etc., then such a text creation service may be considered an investment advisory business.
AI services that specialize in investment advice and are provided for a fee likely require investment advisory license certification. Currently, the “sale of computer software, such as investment analysis services,” is understood to not constitute investment advisory services if the tools are available to anyone without additional support, such as through retail sales by retailers or download sales via networks. However, if the tool requires ongoing investment information or other support from a distributor, registration may be required (see the “Comprehensive Supervision Guidelines for Financial Instruments Business Operators, etc.” below). Paid AI services specialized in investment advice are likely to secure their value through ongoing data provision and tuning by the AI provider, which may result in investment advisory services.
On the other hand, when financial institutions provide investment information free of charge for the purpose of general information provision, the requirement that “the other party pays compensation” does not apply, and therefore investment advisory services are not required.
The problem is that, although it is believed that AI has not yet evolved to that extent, if there is, for example, a general-purpose generative AI that also collects a large amount of information on financial products and, as a result, is able to provide investment advice, which is normally free of charge, but if you become a paid member you can get a quicker response, etc., would this be considered an investment advisory business?
In our opinion, even if one becomes a paid member of such an AI, this is not a fee for investment advice, but rather a way to obtain benefits such as speeding up AI in general, and therefore does not constitute investment advisory business. However, if AI continues to evolve in the future, further consideration will be needed as to whether this interpretation is appropriate.
Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc. VII-3-1(2)②c ② Activities that do not constitute investment advisory and agency business A. Activities that provide investment decisions based on the analysis of the values of securities or financial instruments (hereinafter referred to as “investment information, etc.”) to an unspecified number of persons by methods that allow an unspecified number of persons to purchase them at any time. For example, persons who provide investment information, etc. by methods set forth in a to c below are not required to register as an investment advisory and agency business. However, even if the target audience is an unspecified number of persons, it should be noted that registration is required in cases where highly individual and relative investment information. is provided by using information and communications technology such as the Internet, or where investment information cannot be purchased or used without membership registration (one-off purchases or use are not accepted). a. Sales of newspapers, magazines, books, etc. (Note) When these are displayed in the stores of general bookstores, kiosks, etc., and are available for anyone to freely view, decide, and purchase at any time. On the other hand, please note that registration may be required when selling reports, etc. that can only be purchased by applying directly to a dealer, etc. b. Sales of computer software such as investment analysis tools (Note) When the software is available for purchase by anyone at any time, freely, based on the investment analysis algorithms and other functions of the computer software, through over-the-counter sales by retailers or download sales via networks, etc. On the other hand, please note that registration may be required when it is necessary to receive data related to investment information, etc. or other support from a dealer, etc. on an ongoing basis when using the software. (https://www.fsa.go.jp/common/law/guide/kinyushohin/07.html#07-03 ) |
Reservations
The contents of this article have not been confirmed by the relevant authorities and merely describe arguments that are reasonably considered legal. Furthermore, they represent only our current views, and our views may change.
This article is merely a compilation for this blog. If you require legal advice for a specific case, please consult with a lawyer.
In recent years, quantum computers and other “quantum technologies” have rapidly been attracting attention. Specifically, quantum technology is expected to bring about high computing power and innovations in encryption technology that surpass conventional information technology, and various parties both in Japan and overseas are working on its practical application.
On the other hand, new issues are emerging, such as the risk of existing encryption being broken, and it is expected that there will be an increasing number of situations in which quantum technology will be required in national security, cybersecurity, and contract practice. This article focuses on quantum computers as a representative example of quantum technology, providing an overview of quantum computers and summarizing the main points of contention under current Japanese law.
[Author Profile] Passed the bar exam in 2010. Professional experience includes system procurement and risk management at the Bank of Japan, with additional roles in the finance and international relations departments. Earned an MBA from INSEAD. Currently engaged in Web3, fintech, and other startup and corporate legal matters at So Sato Law Offices. Participated in the “Q-Quest” human resource development program under the Ministry of Education’s “Light and Quantum Leap Flagship Program,” and received an award in the program’s business contest. Since completion of the program, has been exploring opportunities in quantum business and gaining insights into quantum technology from a business perspective. |
1. National Security Legislation ・Foreign Exchange and Foreign Trade Act: With the revision of Cabinet Orders and Ministerial Ordinances in 2024 and 2025, quantum computers and related items will be subject to export and technology transfer permission. The restrictions are currently expanding, and manufacturers and others need to continue to pay attention to the restrictions. ・Economic Security Promotion Act: “Quantum information science” has been designated as a specific important technology and will be subject to research and development support through public-private councils and large-scale subsidies. In addition, quantum technology is not currently subject to the “patent non-disclosure system,” but there is a possibility that this will change in the future. ・Act on the Protection and Utilization of Critical Economic Security Information To be enacted in May 2025. It will establish a mechanism for protecting and utilizing information related to important infrastructure and important material supply chains. In relation to these, quantum technology-related information may also be subject to strict management as “important economic security information” (however, this will only be limited to government-held information). 2. Cybersecurity Legislation: Although the current law does not directly mention quantum technology or Post-Quantum Cryptography, if the threat of the spread of quantum computers increases, measures based on existing laws may be required. Movements have already begun at the guideline level, with the Financial Services Agency’s guidelines to specify attention to quantum computers in October 2024, and a request to major and regional banks to quickly switch to Post-Quantum Cryptography in May 2025. 3. Contractual issues regarding the use of quantum computers It may become necessary to stipulate in contracts the scope of liability and disclaimer clauses (probabilistic results, potential errors, etc.) that differ from those for classical computers in terms of the challenges and characteristics unique to quantum computing. Given the large scale and high cost of actual machines, cloud-based quantum computing is the general method of use, but there is no established standard for quality assurance (error rate, uptime, etc.). Companies are publishing various indicators of quality. |
Quantum computers use quantum properties such as “superposition”, “entanglement”, and “quantum tunneling” to perform calculations, which are expected to enable calculations that are significantly faster than conventional computers (known as classical computers) for certain problems.
[Terminology] ・Quantum Superposition: Classical computer bits can only be in the “0” or “1” state, but quantum bits can be in the “0 and 1” state at the same time. For example, while a coin is spinning, it is not yet clear whether it will land on heads or tails. This superposition allows a quantum computer to process multiple calculation patterns in parallel with one quantum bit, achieving significantly faster calculations than classical computers in certain tasks. ・Quantum Entanglement: A phenomenon in which multiple quantum bits remain in linked states. For example, when two quantum bits are entangled, measuring one of them instantly determines the state of the other, regardless of distance. It is expected that this property can be used to link bits together to perform complex parallel calculations and realize highly secure quantum cryptography. ・Quantum Tunneling: A phenomenon in which quantum mechanical properties allow the “slip-through” of energy barriers that cannot be overcome in classical physics. In optimization problems, slipping through the “mountains” between the valleys rather than overcoming them makes it easier to reach the optimal solution, enabling efficient search. |
There are two main types of quantum computers: Gate-Based Quantum Computers and Quantum Annealers.
Method | Basic principles/properties | Main applications | Representative companies |
Gate-Based Quantum Computer | Using quantum “superposition” and “entanglement,” complex problems can be calculated in parallel for high-speed processing | Versatile quantum algorithms support a wide range of applications (e.g., chemical simulation and machine learning) | Google (superconductivity), Intel (semiconductors), IonQ (ion traps), PsiQuantum (light), QuEra Computing (neutral atoms) |
Quantum Annealer | Using quantum “quantum tunneling” to explore the lowest energy state | Specializing in optimization problems (logistics route optimization, portfolio optimization, etc.) | D-Wave Systems |
The Gate-Based Quantum Computers are “general-purpose quantum computers” that can execute general-purpose quantum algorithms. Various methods are being researched, including superconductivity, semiconductors, ion traps, light, and neutral atoms. However, mainstream technology has not yet been established, and there are issues such as error correction before it can be put into practical use. In contrast, the Quantum Annealers are specialized for combinatorial optimization problems, and D-Wave Quantum Inc. provides commercial machines. In general, when people say “quantum computer,” they are often referring to the Gate-Based Quantum Computers, but the terms are used differently depending on the application and implementation technology.
Method | How qubits work | Advantage | Issue | Representative companies, research institutes and universities |
Superconducting approach | By passing microwaves through a superconducting circuit, two states of electric current or magnetic flux are converted into quantum bits. | High-speed gate operation * – Existing semiconductor manufacturing technology can be applied |
– Noise and errors are likely to occur – Extremely low temperature (close to absolute zero) environment required |
[Internet] Google, IBM, RIgetti [Japan] Fujitsu, NEC, RIKEN, National Institute of Advanced Industrial Science and Technoology |
Semiconductor approach | Utilizing the state of electrons and spin in semiconductors such as silicon | – High compatibility with CMOS technology, making it easy to achieve large-scale integration in the future | – Quantum bits have a short coherence time, making them difficult to control | [Overseas] Intel, Equal1, Diraq, UNSW University of Sydney [Japan] Hitachi, RIKEN, National Institute of Advanced Industrial Science and Technology, bulueqat |
Ion trap approach | Ions suspended in a vacuum are manipulated with a laser to turn their internal states into quantum bits | – Long coherence time and high gate accuracy | – The equipment tends to become large, making it difficult to arrange many quantum bits. | [Overseas] IonQ, Quantinuum, AQT, Oxford Ionics, Universal Quantum [Japan] RIKEN, National Institute of Advanced Industrial Science and Technology, Qubitcore |
Photonic approach | Converting the state of a photon, such as its polarization or path, into a quantum bit | – Operates at room temperature – High compatibility with quantum communication and networks |
– Large-scale integration and error correction technologies are still in development – Photon source and detector are issues |
[Overseas] PsiQuantum, Xanadu [Japan] NTT, RIKEN, University of Tokyo, OptQC |
Neutral Atom approach | Utilizing the internal state and configuration of neutral atoms cooled and aligned by laser | – It is relatively easy to arrange a large number of quantum bits, making it highly scalable. | – Gate operation is slow – High precision laser control is required |
[Overseas] Computing, Pasqal, Infleqtion, Atom [Japan] National Institute of Advanced Industrial Science and Technology, Institute for Molecular Science, Kyoto University, Yaqumo |
*Gate operation: A basic operation in which a quantum bit is given a certain stimulus (such as a microwave pulse or laser pulse) to change its state, and corresponds to the logical gates (AND/OR/NOT, etc.) of a classical computer. Examples include the X gate (which swaps the quantum bit’s 0 and 1) and the H (Hadamard) gate (which puts the quantum bit into a superposition state). The key to developing quantum hardware is to perform these gate operations quickly and with high precision.
On the other hand, Quantum Annealers are specialized for “combinatorial optimization” and cannot perform general-purpose calculations, but it is more advanced in practical use than Gate-Based Quantum Computers. In addition to the commercial machine provided by D-Wave, a Canadian company, “Quantum-Inspired Annealing” (Fixstars Amplify AE, Fujitsu Digital Annealer, etc.), which reproduces the behavior of classical computers in a pseudo-manner, has also been developed.
In January 2025, NVIDIA CEO Jensen Huang said that it would take about 20 years to realize a practical quantum computer, causing a sharp drop in quantum-related stocks in the United States. This is thought to be a forecast referring mainly to Gate-Based Quantum Computers, and at the time of writing this article (end of May 2025), many experts believe that it will take a considerable amount of time before they can be put to practical use. The main reason is that errors (decoherence due to external noise) that occur in the process of maintaining “superposition” and “entanglement” in Gate-Based Quantum Computers are serious, and advanced “error correction” technology is essential to resolve this. However, it is still thought that a considerable amount of time will be required to establish error correction technology, which is the background to the view that it will take 10 to 20 years.
However, research and development of various Gate-Based Quantum Computer approaches are accelerating around the world, and in Japan, large companies, startups, research institutes, and universities are competing to develop actual machines. In addition, commercial machines for the Quantum Annealers are already in widespread use, and an environment for online use has been established. In this way, quantum technology is not a “Matter of the distant future”, but technology that is currently being implemented in society.
Field | Examples of usage scenarios |
Finance and Economics | – Portfolio optimization (instantly calculate optimal allocations from a huge number of combinations) – Accelerating risk evaluation and price simulation |
Logistics and Supply Chains | – Optimization of vehicle routes and warehouse layouts – Planning optimal transportation and movement routes during disasters and peak demand |
Energy Smart Grid | – Optimization of power grid supply and demand – Real-time control taking into account fluctuations in renewable energy |
Material Design and Drug Discovery | – Predict the properties of battery materials and candidate drug molecules with high accuracy using quantum chemical calculations |
Healthcare Genomics | – Accelerating gene sequence analysis – High-precision prediction of protein structure |
Weather and Climate Simulation | – High-resolution calculations of atmosphere-ocean models – Scenario evaluation of greenhouse gas reduction measures |
Machine Learning and AI | – Quantum reinforcement learning to achieve high accuracy even with small data sets and to accelerate generative AI learning |
In the fields mentioned above, there are hopes for the realization of “quantum supremacy,” which would enable calculations that would take years on classical computers to be completed in a short time. However, quantum supremacy does not necessarily come with benefits; it also comes with risks to existing technologies. A typical example is the weakening of encryption technology, and there are concerns that quantum computers may be able to crack conventional public key cryptography.
Cryptanalysis | If practical-scale quantum computers were to become available, currently widely used public key cryptography such as RSA and elliptic curve cryptography would be decrypted in a short time, threatening to instantly undermine the security of all aspects of society, including Internet communications and electronic payments. |
Current encryption technology is based on mathematical problems that are difficult to decrypt using classical computers, but when quantum computers become practical, they may be decrypted in a short time using techniques such as “Shor’s algorithm.” This puts public key cryptography, which is used in every aspect of business and daily life, at risk, and is also thought to affect blockchain, which is based on tamper resistance. Furthermore, a method known as the “Harvest Now, Decrypt Later attack” has been pointed out as a risk of intercepting and storing data at present, and then decrypting it all at once in the future when quantum computers become practical. For this reason, there is an urgent need to transition to “Post-Quantum Cryptography (PQC),” which is difficult to decrypt even with a quantum computer. In the United States, the National Institute of Standards and Technology (NIST) selected several PQCs as candidates for standardization in August 2024, and has continued to consider them since then. In Japan, CRYPTREC (Cryptographic Technology Evaluation Committee), which evaluates and monitors cryptographic technologies, will publish the “CRYPTREC Cryptographic Technology Guidelines (Post-Quantum Cryptography) 2024 Edition” at the end of March 2025.7, which provides technical explanations, evaluations, and implementation guidance for various PQCs. Since encryption technology is the foundation of all services, each business operator needs to pay close attention to the standardization trends of these PQCs and begin preparations early.
Overseas, major countries are making large-scale investments in quantum technology, and some countries are also focusing on developing legal infrastructure. Japan must also keep a close eye on these trends and strive to balance its international competitiveness with issues such as cybersecurity and national security.
Country | Trends |
US | In 2018, the federal government passed the National Quantum Initiative Act, which allows the federal government to work to promote quantum R&D and build a system for developing human resources. |
EU | The EU has launched a large-scale project worth 1 billion euros called the “Quantum Flagship” and is leading research and development into quantum computers and quantum communications. |
China | The nation is investing heavily in research and development of quantum communications and quantum computers, with a particular emphasis on applications in the military and security fields. |
In Japan, at the time of writing this article (end of May 2025), there is no specific law targeting quantum technology. Looking at other cutting-edge technology fields, various regulations have already been imposed on blockchain (crypto assets, etc.), and in May 2025, the Act on Promotion of Research, Development and Utilization of AI-Related Technologies was passed with the aim of promoting utilization and reducing risks.8 9 It is possible that a dedicated law for quantum technology will be enacted in the future, but for now, it is necessary to consider the applicability of existing laws for each use case. Specifically, we will review (1) how national security-related laws relate to export control and development support for quantum equipment and technology, and (2) how cybersecurity legislation will handle the impact of quantum technology on existing cryptography. Furthermore, (3) when providing and using quantum services, new issues will arise that need to be considered, such as contractual allocation of responsibility and exemptions, and quality assurance. We will provide an overview of the legal framework regarding these issues.
The United States and China are investing heavily in quantum technology on a national scale, as it is directly linked to national security in terms of invalidating existing encryption technology and making communications difficult to intercept. In the United States, the National Quantum Initiative Act was enacted in 2018 with the aim of maintaining and strengthening both economic competitiveness and national security. A quantum R&D system was established through collaboration between universities, companies, and research institutes and large-scale budget investment. Japan does not have a law specifically related to quantum, but the advanced quantum field may be subject to existing security-related laws (Foreign Exchange and Foreign Trade Act, Economic Security Promotion Act, and Important Economic Security Information Protection and Utilization Act). We will consider how research and development of quantum computing and quantum sensors can be regulated and supported from a security perspective within the framework of these existing laws.
The Foreign Exchange and Foreign Trade Act is a law that controls the overseas provision of goods and technology and investment from abroad from the perspective of national security. Specifically, it stipulates 1) export restrictions (to prevent overseas outflow), 2) restrictions on service transactions (including the provision of intangible technology), and 3) restrictions on inward direct investment (prior notification for investment and acquisition by foreign capital).
Quantum technology is one of the areas in which there is concern about the risk of goods and technology being leaked overseas. For this reason, a revision to the Cabinet Order and Ministerial Ordinance in September 2024 will make quantum computers subject to export controls, and permission will be required for exports to all regions.10 Furthermore, the amendments coming into force on May 28, 2025 will similarly add key technologies and materials essential to practical-scale quantum computers as targets for regulation.11 12 In addition, the transfer of technology regarding quantum computers and related items that are subject to export controls is also subject to regulations.13
Regulated (as of the end of May 2025) | Official Location |
Quantum computing | All regions |
Quantum computer-related items: Cryogenic refrigerators Cryogenic amplifiers Cryogenic wafer probers Isotope separation Silicon/germanium substrates and raw materials |
All regions |
Given that export and technology transfer restrictions under the Foreign Exchange and Foreign Trade Act are currently expanding, quantum-related companies will need to establish a system that allows them to constantly check whether their products and technologies are subject to restrictions.
The Economic Security Promotion Act (“Act on Promoting Security through Integrated Economic Measures”) enacted in 2022 aims to support the technology and materials of domestic companies and research institutions and strengthen national security from an economic perspective. The specific mechanism is based on the following four pillars. These measures14hope to reduce risks through public support and information sharing.
In the third pillar- advanced technology support, “quantum information science” has been designated as a specific important technology.15 Research and development will be promoted and utilized through the provision of financial support, the establishment of a council to provide support through public-private partnerships, and the outsourcing of research and study work.
In addition, the fourth pillar, the patent non-disclosure system, allows for measures such as withholding the disclosure of inventions that pose security risks and prohibiting foreign applications. At the time of writing this article (end of May 2025), quantum computers and quantum cryptography communication have not been designated as “specific technology fields” that are subject to this system. However, given the intent of the law, the assumption can be made that they may be designated in the future, so it is a system that developers should be aware of.
On May 16, 2025, the Act on Protection and Utilization of Important Economic and Security Information came into force. Previously, the Act on the Protection of Specially Designated Secrets was a security clearance system for defense, diplomacy, terrorism, and espionage-related information.16, but this Act aims to expand into economic security, establishing a system for protecting and utilizing information related to important economic infrastructure.
The Act first defines the systems for providing critical infrastructure and the supply chains of important materials as “critical economic infrastructure” (Article 2, Paragraph 3). It then defines four types of information as “critical economic infrastructure protection information,” including measures to protect the critical economic infrastructure, and information on the vulnerabilities of the critical economic infrastructure and innovative technologies related to security (Article 2, Paragraph 4). Furthermore, among the information that falls under the category of critical economic infrastructure protection information, there is a mechanism by which the government may designate information that is not publicly known and meets the requirement of confidentiality as “important economic security information” (Article 3, Paragraph 1).
The purpose of this law is to both “protect” and “utilize” designated important economic and security information. Specifically, to properly handle economic information held by the government that is important for national security, the law stipulates the requirements for businesses that are permitted to provide information designated as important economic and security information, as well as the methods of evaluating the suitability of individuals who handle the information. Note that the designation is strictly limited to government-held information, and technical information independently developed by private companies is not unilaterally designated and its handling is not restricted.
As mentioned in (i), the Act on the Protection and Utilization of Important Economic and Security Information covers four types of information related to the protection of important economic bases (critical infrastructure and supply chains of important materials). Specifically, it includes information directly related to national security, such as measures, plans, and research to protect infrastructure from external threats, infrastructure vulnerabilities, and innovative technologies. The infrastructure and materials covered are to be determined by reference to those stipulated in the Economic Security Promotion Act and the “Action Plan for Cybersecurity of Critical Infrastructure.”17This includes infrastructure such as electricity, gas, water, communications, transportation, logistics, finance, chemicals, and medicine, as well as important supplies such as semiconductors and advanced electronic components.
Quantum technology, such as quantum computers that pose a risk of breaking existing encryption, and quantum cryptography communication that increases security, is highly likely to fall under the category of information relating to the protection of critical economic infrastructure mentioned above, and it is quite possible that it will be designated as important economic and security information in the future. However, to repeat what was stated in (i), only government-held information can actually be designated as important economic and security information, and technologies developed in-house by private companies are not unilaterally designated as such.
In addition to national security, quantum technology is also an issue in Japanese law in relation to cybersecurity. As mentioned in II 3., the development of quantum computers poses the risk that conventional encryption technologies may be decrypted.
In Japan, the Basic Act on Cybersecurity imposes the responsibility to ensure security on the state and businesses, and the Personal Information Protection Act requires the appropriate management of personal data. At the time of writing this article (end of May 2025), these laws do not specifically mention quantum technology or Post-Quantum Cryptography (PQC). However, if the spread of quantum computers compromises existing cryptography and increases security risks, it is possible that necessary measures will be required to be taken based on these laws even if they are not explicitly stated in the articles.
In response to this, quantum technology has already been mentioned at the guideline level. The Financial Services Agency has published the “Guidelines on Cybersecurity in the Financial Sector” for financial institutions.18” (published on October 4, 2024). It clearly states that when collecting and analyzing threat and vulnerability information, “collect information while paying attention to the circumstances surrounding the organization, such as new technologies (AI, quantum computers , etc.), geopolitical trends, disinformation, and industry trends” as “matters that it is desirable to address.”
Furthermore, according to the Nihon Keizai Shimbun (dated May 14, 2025)19, the Financial Services Agency is calling on major and regional banks to immediately begin preparations to transition to PQC. It appears that the agency is calling for an immediate response, as PQC compliance will require years of system modifications and other costs.
When users use quantum computers, the question of how to deal with possible errors and fluctuations in the quantum computing results in a contract may arise. Such questions may arise due to the challenges and characteristics unique to quantum computing.
As mentioned above, errors that occur during calculations are a major issue with Gate-Based Quantum Computers. In addition, some quantum algorithms are run repeatedly to extract the statistically best solution, meaning that the same input does not always produce the same output. The Quantum Annealers may also produce different solutions each time it is executed due to the nature of its principle (probabilistically searching for solutions with low energy), hardware noise, thermal noise, etc. In addition, large-scale calculations that involve quantum supremacy are difficult to reproduce and verify on classical computers.20, meaning one cannot fully guarantee the correctness of the output.
For these reasons, there is a risk that the results of quantum computing will contain errors and fluctuations, which will affect subsequent predictions and simulations. As the number of services using quantum computers increases, it may become necessary to clarify the scope of responsibility for hardware (quantum processors), software (algorithms), user circuits and data, and to introduce clauses that differ from traditional IT contracts, such as disclaimer clauses that assume that results are probabilistic and that there are potential errors.
Because the actual equipment for both the Gate-Based Quantum Computers and the Quantum Annealers are large-scale and expensive, cloud-based quantum computing, in which equipment provided by hardware vendors is used via the cloud, is expected to become the standard method of use for the time being.
In conventional cloud computing, a certain level of uptime is guaranteed under a service level agreement (SLA), but in the case of cloud-based quantum computing, the question of what kind of quality guarantees (error rate, uptime, etc.) should be made can become an issue. For example, IBM Quantum Platform (Gate-Based Quantum Computer), D-Wave Leap (Quantum Annealer), and Amazon Braket (which handles multiple external Gate-Based Quantum Computers and Quantum Annealers via API) each publish various indicators (gate error rate, coherence time, time required to process a job, etc.), but it seems that a standard approach has not yet been established.
Disclaimer
The contents of this document have not been verified by the relevant authorities and are merely a description of arguments that are reasonably considered in accordance with the law. In addition, they represent only our current views and may be subject to change.
This is just a summary for the blog. If you need legal advice for a specific case, please consult a lawyer.
I’ve recently become obsessed with visiting the Osaka Kansai Expo. Recently, I received an invitation from a company where I serve as an external director to visit the “Future of Life” pavilion (official website: https://expo2025future-of-life.com/en/) by Professor Hiroshi Ishiguro, who is renowned for his work with androids. This experience made me deeply contemplate legal issues.
While this might be a slight spoiler, the exhibition presents a future where humans can become androids. It features a story of a grandmother and granddaughter who are close to each other. As the grandmother’s health deteriorates, she faces a choice: to die naturally or to continue living through androidization. The pavilion also features numerous other androids, creating an exhibition that makes visitors contemplate what “life” truly means. I should note that while I have visited over 40 pavilions so far, the “Future of Life Pavilion” is particularly recommended among them!
This raised a legal question for me as a lawyer. If humans could transfer their consciousness and memories to androids and “continue living” for 100, 500, or even 1,000 years beyond their biological lifespan, what stance should the law take? Specifically, can we legally treat the original human and their post-androidization existence as the same legal person?
An android gazing at itself in a mirror – can it truly be called “the former me”?
Under the laws of most countries today, a person acquires rights at birth and loses them upon death. This fundamental principle of “biological death = extinction of legal personality” has been the foundation of legal systems worldwide for hundreds of years.
However, if technology enables consciousness and memories to be electronically preserved and transplanted into a different body (an android), this principle would face fundamental reconsideration. How should the law treat an existence that is biologically dead but whose personality and memories continue?
Note: This paper discusses androidization through digital transfer of consciousness and memory, not physical brain transplantation. It also distinguishes from cyborgization (replacing parts of living organisms with machines) and deals with complete personality transfer to an artificial body.
Legal approaches to this problem can be broadly divided into four categories:
This position treats the android as a “thing” without legal capacity once the physical body perishes and legal personality ends. From the standpoint of current law, this would basically be the prevailing view.
The android would be owned by heirs as inherited property, and the original human’s rights and obligations would be processed through normal inheritance procedures. In this case, the inheriting grandchild would own grandmother’s android as a “thing,” making it legally possible to sell it on marketplace apps or dispose of it as bulky waste – a result that borders on dark humor.
While legal stability would be maintained, the motivation to choose androidization would be significantly undermined. Few people would actively desire androidization if they might be treated as “things” subject to sale or disposal. Moreover, since they would lose all property rights and contractual status, they would be completely severed from the social positions and relationships they had built.
Is grandmother just a “thing”?
This position emphasizes the continuity of memory, personality, and self-consciousness, treating the android as the same legal subject as the original human. In this case, property rights, family relationships, and contractual status would all be inherited as-is, and the person would be treated as “living” in the family registry.
While this would be the most desirable outcome for the individual, the impact on the entire legal system would be enormous.
This position recognizes personality in androids, but the android is registered as a completely new legal subject, while the original human’s rights and obligations are processed through normal inheritance procedures.
From this standpoint, the android would begin a new life from zero as a “newly born adult.” While freed from past entanglements, they would also lose the human relationships and social status they had built.
This is a compromise position that allows succession of only certain rights through special legislation. For example, a system could be designed where personal rights and family relationships are inherited, but property rights go through inheritance procedures.
Specifically, personal rights such as name rights and portrait rights, status relationships as spouse or parent-child, and support claim rights would be recognized for succession, while property rights such as real estate ownership, stocks, and deposits would still require traditional inheritance procedures.
The significance of this Limited Succession Theory lies in legally protecting the emotional connections of families and personal identity while ensuring the stability of socioeconomic systems. It can legally guarantee, albeit limitedly, the continuity of human relationships that would be lost through complete severance.
Comparison of Legal Positions on Androidization
Item | Non-Personality Theory | Personality Continuity Theory | New Personality Theory | Limited Succession Theory |
Basic Concept | Personality ends with physical body demise, treated as a property | Emphasizes continuity of memory and personality | Grants personality as new legal subject | Certain rights only succeed through special law |
Legal Status | No legal capacity (treated as property) | Continues as same personality | Newly created legal person | Limited rights subject |
Property Rights | Processed through inheritance | All succeeded | Processed through inheritance | Goes through inheritance procedures |
Personal Rights (name, portrait, etc.) | No succession | All succeeded | Newly acquired | Partially inheritable |
Family Relations | Treated as family asse | Continues | Newly established | Continues |
Family Registry Treatment | Death certificate filed, registered as property | Continues as living | New birth certificate | Special registration system |
Inheritance Tax | Taxed normally | Not taxed | Taxed normally | Only property portion taxed |
Benefits to Individual | Minimal (treated as property) | Maximum (all rights continue) | Small (new life but no rights) | Moderate (personal rights protected) |
Social Impact |
Minimal (maintains current system) | Enormous (fundamental system change) | Moderate (family registry expansion) | Moderate (partial system change) |
Feasibility | Easiest (current law as-is) | Difficult (fundamental legal reform) | Somewhat difficult (new system creation) | Moderate (special legislation) |
Would current legal systems function when androidization allows humans to live for 1,000 years? If androidization achieves effective immortality, many current legal systems could become dysfunctional.
The inheritance system would fundamentally change. If people don’t die, inheritance doesn’t occur. As a result, assets like real estate and stocks would be permanently occupied by the same individuals, severely impeding social fluidity.
Contract relationships would also become abnormally long-term, potentially causing rigidity in the entire socioeconomic system.
If one spouse becomes an android, what happens to the marriage relationship? Since the androidized spouse is legally “living,” the other spouse’s remarriage would raise bigamy issues.
Parent-child relationships would also become complex. The relationship between androidized parents and subsequently born children, and the scope of support obligations across generations – these are problems traditional family law never anticipated.
The penal system would require fundamental revision. The meaning of life imprisonment would be relativized, and consistency with statute of limitations would become problematic. The concept of “rehabilitation potential,” one of the foundations of punishment, would also change significantly when premised on lifespans of hundreds of years.
Would democracy remain viable if immortal beings continued to hold political power? The impact extends beyond legal issues to affect democratic institutions themselves.
In a society where only the wealthy can choose androidization, they would continue exercising political and economic influence for hundreds of years. An “immortal elite class” with voting and candidacy rights could monopolize decision-making, impeding social renewal through generational change. As Piketty pointed out that “the return on capital exceeds economic growth rate (r > g),” the phenomenon of wealth accumulation and expansion could be further accelerated by the perpetual androidization of the ultra-wealthy.
Pension systems, healthcare systems, and education systems – current social security systems are designed based on average human lifespan. These systems would also require fundamental revision.
[Column: The Multiple Android Problem – Who is the “Real” One?]As technology advances, multiple androids could potentially be created simultaneously from one person’s consciousness and memory. For example, suppose there exists “Android 1” created from Person A’s memory transfer and “Android 2” later restored from a backup. Furthermore, if biological Person A is still alive, we would have a three-way coexistence of “Person A + Android 1 + Android 2.” In such cases, the following legal problems would arise: ◆ Identification of Rights Holders
◆ Property and Contractual Confusion
◆ Overlapping Family Relationships
Such problems could fundamentally shake legal systems in a future where single personalities can be digitally “replicated.” While current law doesn’t anticipate such situations, “uniqueness guarantee,” “identity authentication,” and “centralized management of digital personalities” might be required as premises for future system design. |
“I’m the real one!”
How should our legal system evolve to address such a future society?
This would establish a new family registry system specifically for androids, recognizing personality succession based on clear expressions of intent made during one’s lifetime. The scope of inheritable rights would be clearly defined in written law to ensure legal predictability.
Digital Personality Registration System Process Flow
To ensure social fluidity, this system would limit personality succession to a specific period (for example, 50 years). After the period expires, mandatory status transfer would occur, legally guaranteeing generational change.
This would create “Android Corporations” as entities between individuals and corporations, recognizing limited legal personalities that inherit only specific rights. This system aims to balance continuity of social roles with legal stability.
As background, I previously worked as a financial lawyer creating Charitable Trusts in jurisdictions like the Cayman Islands and establishing corporations with no shareholders. Even if android personality rights were restricted, it might be possible to create a system where companies and foundations are established, all assets transferred to them, and the android embodiment directs these entities. This could potentially enable survival while maintaining assets for 1,000 or even 2,000 years.
By applying such existing legal schemes, we could potentially achieve substantial rights succession after androidization. We may need to consider whether such schemes should be prohibited.
Android Substantial Rights Holding Structure (Cayman Islands-type Scheme Example)
[Column: Can AI Be Granted Legal Personality? – Legal Status of “Bodiless Intelligence”]When discussing personality succession through androidization, another intriguing question emerges: “Can pure AI (artificial intelligence) be granted legal personality?” ◆ However, Could This Apply to “Memory-Holding AI”?Meanwhile, systems like “memorial AI” that learns a person’s voice, speech patterns, and values, or “Digital Executor” AI that realizes posthumous wishes, are progressing as real technological challenges. ◆ Direction for Legal Organization
Thus, AI and androids are fundamentally different in their “nature of personality” and “legal roles.” While this paper focuses on “how to inherit personality,” the separate question of “whether to grant personality to new intelligence” will also be an unavoidable issue in future legal system design. |
If such technology becomes reality, significant changes will be required in legal practice. New legal service demands will emerge, including preparation of lifetime intent documents regarding androidization, establishment of digital asset management and succession contracts, and support for family consensus building.
The legal profession will also urgently need to establish ethical codes responding to new technologies and continuous training systems.
Humans as Digital Information
What I felt from viewing Professor Ishiguro’s exhibition was the magnitude of technology’s impact on legal systems. While the issue of personality succession through androidization remains in the realm of thought experiments at present, considering the speed of technological development, this is an area where the legal profession should begin discussions early.
Legal studies must find answers to fundamental questions: What is humanity? What is personality? What is the individual’s position in society? In an era where technology transforms society, new challenges await legal professionals.
Note: This paper represents the author’s personal views as part of thought organization and does not predict or guarantee future legal systems. While Saito is somewhat positive about androidization, there is absolutely no intention to encourage readers to “please become androids!”
This article describes the structure of “Babylon,” a pioneering Bitcoin (BTC) staking project and considered the largest of its kind today, and the related issues under Japanese law.
Until now, staking has mainly taken place on Proof of Stake (PoS) chains such as Ethereum. Staking in PoS is a mechanism to increase the security of the chain by participating in the validation of transactions on the network, etc., in exchange for a reward.
In contrast, because Bitcoin employs Proof of Work (PoW), it has been believed that, in principle, there is no revenue opportunity from staking in the traditional sense of the term. The most common means of monetization using BTC has been through centralized lending services and tokenization solutions such as wBTC (Wrapped BTC).
Babylon is a project that aims to overcome these limitations of BTC utilization and realize trustless staking using BTC, and is currently one of the most popular protocols in this field. This paper examines its technical structure and issues under Japanese law.
In order to fully understand Bitcoin staking, it is helpful to have a foundational understanding of the staking mechanisms used in PoS chains, as well as the concepts of liquid staking (e.g., by LIDO) and restaking (e.g., by EigenLayer).
For more information on these topics, please refer to the following articles authored by our firm:
(References) Our previous Article on POS chain staking (in English) ・https://innovationlaw.jp/en/staking-restaking-under-japanese-law/ Our previous Articles on POS chain staking (in Japanese) ・Organizing Legal Issues on Staking 2020.3.17 ・DeFi and the Law – LIDO and Liquid Staking Mechanisms and Japanese Law 2023.10.17 ・EigenLayer and other Restaking Mechanisms and Japanese Law 2024.5.10 |
(1) The Babylon mechanism itself does not appear to fall under the custody regulations under the Payment Services Act (PSA). (2) The structure of Babylon is not considered to constitute a collective investment scheme (fund) under the Financial Instruments and Exchange Act (FIEA). (3) If a liquid staking provider holds custody of a user’s BTC private key, such a provider may fall within the scope of custody regulations under the PSA. Legal classification should be assessed on a case-by-case basis depending on the structure. (4) Japanese crypto asset exchanges are generally permitted to offer BTC staking services through Babylon under the current legal framework. (5) One practical issue for Japanese crypto asset exchanges is that the rewards granted through the Babylon protocol may be altcoins that are not classified as “handled crypto assets” for that exchange. In such cases, the exchange is not permitted to custody these altcoins on behalf of users under current Japanese regulations. Accordingly, alternative measures must be considered, such as (i) transferring the altcoins to the user’s unhosted wallet, or (ii) selling or swapping them via a DEX or an overseas partner, and then crediting the user with BTC or Japanese yen. |
Bitcoin uses PoW (Proof of Work), which means that staking is not possible in the same way as with Ethereum.
Babylon introduces a new mechanism that enables BTC staking, with the following key features:
1 BTC is staked not to secure the Bitcoin network itself, but to secure other networks that rely on PoS-like economic security mechanisms, collectively referred to as Bitcoin-Secured Networks (BSNs). 2 Rewards are determined by the secured networks, typically in the form of their native tokens. 3 BTC can be used to secure multiple such networks simultaneously, potentially increasing yield (albeit with higher associated risks). 4 Staking does not require transferring the BTC private key; instead, it is conducted in a trustless and non-custodial manner using one-time signatures (EOTS: Extractable One-Time Signatures). |
One of Babylon’s most important features is that it uses Bitcoin to enhance the security of “other” PoS networks.
The eligible networks are those that meet certain technical requirements and generally fall under the broad category of PoS-based systems—i.e., networks that have their own validator sets.
Currently, Babylon has announced test integrations and partnerships with various types of networks, including rollups, data availability (DA) chains, and oracle networks.
n a Proof-of-Stake network, security is provided by validators who stake assets—either their own or those delegated to them by third parties—to verify transactions and produce blocks.
If validators behave dishonestly, the staked assets may be slashed (i.e., partially confiscated), creating a strong financial incentive to act honestly and support the stability of the network.
In many PoS networks, delegated staking is possible, allowing token holders who do not run validators themselves to delegate their tokens to trusted validators.
In such cases, validators are responsible for the staked assets regardless of whether they are self-staked or delegated.
However, in order to participate in staking—either directly or via delegation—users must first acquire the native token of the target PoS network.
For emerging or smaller-scale networks, this presents several challenges:
Babylon aims to address these challenges by allowing Bitcoin holders to contribute to the security of such networks—collectively referred to as Bitcoin-Secured Networks (BSNs)—without requiring them to acquire the native token or transfer custody of their BTC.
Security participation is instead enabled through a trustless, signature-based mechanism.
As mentioned above, Babylon introduces a mechanism to enhance the security of PoS-based networks by leveraging BTC, an external asset, to address the inherent security limitations these networks may face.
Specifically, BTC holders contribute economic security by staking their BTC, which is used to support the security of external networks.
Importantly, this BTC collateral is not transferred directly to the PoS networks. Instead, it remains in the user’s self-managed script on the Bitcoin network, and staking is performed via the Babylon protocol through a cryptographic signature (digital proof of intent).
This design enables non-custodial and trustless participation, eliminating the need to deposit or lock up BTC with a third party.
By introducing such externally sourced security, PoS networks can leverage BTC’s high liquidity and market capitalization to reinforce their security infrastructure—without relying solely on their native tokens.
This mechanism is particularly promising for emerging PoS networks, where token distribution may be highly concentrated and the validator set small, leading to weaker security. Babylon’s BTC-based model may serve as a viable complement to address these vulnerabilities.
The rewards for staking BTC through Babylon are not paid in BTC itself, but in the native tokens designated by the PoS network that receives the security service.
From the perspective of the PoS network, this structure allows it to externally source economic security (in the form of BTC) by using its own native tokens as incentives. Through appropriate token issuance and incentive design, the network can attract BTC stakers without requiring external capital.
For BTC stakers, this provides the benefit of earning yield in the form of external PoS network tokens—without needing to transfer or wrap their BTC. This feature may present a new yield opportunity, particularly for long-term BTC holders looking to earn passive returns on their assets.
While Babylon offers BTC holders the opportunity to earn yield, there are several risks associated with the fact that rewards are paid in the native tokens of external PoS networks rather than in BTC.
This structure may also present practical and regulatory challenges, especially for users staking through crypto asset exchanges in Japan. As discussed in Section IV-3 below, it could act as a disincentive for such platforms to offer Babylon staking services.
Risks Associated with Receiving Rewards in Other Tokens • Price Volatility Risk of Reward Tokens The reward tokens received from PoS networks generally have lower market capitalization and liquidity compared to BTC, making them more susceptible to price volatility. Even if the nominal reward amount is high, a sharp decline in the token price could result in a significantly reduced effective yield. • Liquidity and Redemption Risk If the reward tokens are issued by a relatively niche or illiquid chain, they may be difficult to redeem on the open market, or suffer from large bid-ask spreads, reducing the actual profitability of staking. • Continuity and Stability of Reward Design If the PoS network changes its reward policy or reduces incentives in the future, the economic appeal of Bitcoin staking may diminish. Moreover, if the chain’s operations are unstable, there is a risk that rewards may not be distributed properly or consistently. |
Babylon is designed to allow BTC holders to participate in network security as providers of economic collateral—autonomously and non-custodially, without transferring their private keys to any third party.
This architecture enables truly trustless staking, eliminating the need for traditional asset transfers or reliance on custodians.
In conventional staking and DeFi use cases, utilizing crypto assets typically requires one of the following actions:
Both methods effectively require giving up control of the private key, at least temporarily, which introduces risks such as asset leakage or loss due to smart contract vulnerabilities.
Babylon avoids these risks by enabling signature-based staking mechanism. This allows BTC holders to retain full control over their assets while still participating in economic security provision.
Babylon utilizes a cryptographic technique known as Extractable One-Time Signatures (EOTS) to allow BTC stakers to both prove their ownership of BTC and explicitly accept responsibility for contributing to the security of a PoS-based system.
The basic flow of this mechanism is as follows:
1.The BTC staker selects a finality provider and generates the transaction data necessary to initiate staking. 2.The transaction includes the following conditional clauses: (i) The designated BTC cannot be transferred for a fixed period (e.g., three days); (ii) If certain predefined conditions arise during that period, the BTC will be sent to a predetermined address (typically a burn address); (iii) However, the BTC staker retains the right to cancel (revoke) the transaction at any time before the fixed period ends, as long as no slashing condition has been triggered. 3.The “predefined conditions” referred to in (ii) generally correspond to slashing events—e.g., if the selected finality provider engages in dishonest behavior (such as submitting double signatures), the BTC will be forcibly sent to the burn address as a penalty. 4.The BTC staker finalizes the process by signing the transaction using a one-time EOTS (Extractable One-Time Signature), thereby proving BTC ownership and formally declaring their intent to participate in security provision. |
This design enables PoS networks to receive a security guarantee backed by BTC, a highly liquid external asset, while the Babylon protocol itself provides a comprehensive framework for detecting malicious behavior and executing slashing penalties.
The BTC staking mechanism enabled by Babylon is characterized by a trustless and non-custodial architecture, in the following respects:
This structure, which minimizes the need for trust in third parties, is closely aligned with Bitcoin’s foundational principles of self-custody and decentralization.
However, it is important to note that the system is not entirely “trustless.”
Certain functions—such as verifying signatures, executing slashing, and distributing rewards—are handled by the Babylon Genesis Chain, described below.
In other words, while BTC itself is never directly deposited or locked up, a degree of “protocol trust” is still required—specifically, trust in the legitimate operation and correct implementation of the Babylon protocol, including the Babylon Genesis Chain.
The entities involved in the Babylon ecosystem are diverse, but some of the key participants include following:
Figure: Babylon Overview
• Summary:
Bitcoin-Secured Networks (BSNs) refer to a category of networks (or chains) that enhance their security by integrating Bitcoin’s economic security via Babylon. These networks typically operate on PoS or PoS-like systems and utilize BTC as external collateral to strengthen their security infrastructure.
• Role:
PoS networks, particularly in their early stages, often face security challenges due to a small or overly centralized validator set and insufficient economic collateral. By incorporating BTC through Babylon, BSNs can achieve the following:
• Typical Use Cases (Examples):
• Summary:
Entities that observe and verify block finality on PoS networks secured by Babylon, and submit cryptographic finality signatures accordingly.
• Role:
• Note:
Finality providers differ from traditional validators in other chains. Their core responsibility is to observe the finality of blocks on the target PoS network and report that information to the Babylon chain.
However, they play a somewhat validator-like role in that they create and submit cryptographic signatures, earn rewards for doing so, and are subject to slashing in case of misconduct.
Comparison of Finality Providers and General PoS Validators
Item | Finality Provider (Babylon) | General PoS Chain Validator |
Block Generation | ❌ Not performed | ✅ Performed |
Finality Observation | ✅ Performed | ❌ Typically not involved (finality is emergent) |
Signature Type | ✅ Signs finality data | ✅ Signs blocks and voting messages |
Slashing Risk | ✅ Yes (for fraudulent finality signatures) | ✅ Yes (for double signing, downtime, etc.) |
Reward Mechanism | ✅ Yes (based on submitted signatures) | ✅ Yes (based on block production and delegation) |
• Role:
Hold BTC and contribute to the security of PoS networks by submitting off-chain cryptographic signatures to Babylon.
• Reward:
Receive staking rewards from the PoS networks in return for providing BTC as collateral via Babylon.
• Key Characteristics:
BTC stakers can also delegate their staking to finality providers.
Even in such cases, no BTC or private key is transferred, and the delegation is completed through a non-custodial mechanism.
Function | Description |
Signature Verification | Receives and verifies signatures from BTC stakers and finality providers. |
Slashing Enforcement | Executes slashing penalties when fraudulent or malicious signatures are detected. |
Finality Recording | Records the finality of blocks from PoS networks on Bitcoin (e.g., via timestamping). |
Cross-Chain Relay | Relays verified security information and signatures to other BSNs. |
A protocol that facilitates BTC staking via Babylon on behalf of BTC holders, aiming to improve operational efficiency, usability, and liquidity. While the main focus is on liquid staking, a hybrid model that combines restaking (reuse of the same BTC for multiple networks) may also be adopted where appropriate.
Key functions: (i)Streamlining Operations Since it is burdensome for BTC holders to individually generate signatures and monitor activity across multiple PoS networks, the protocol handles the following tasks: ・Selection of PoS networks for staking ・Automatic generation and management of EOTS signatures ・Collection and distribution of staking rewards (ii) Issuance and Utilization of Liquid Staking Tokens (LSTs) The protocol issues liquid staking tokens (e.g., stBTC) backed by the user’s staked BTC position. This allows the user to retain liquidity of their assets even while staking, enabling secondary use in DeFi and other ecosystems. (iii) Complementary Use of Restaking By carefully managing risk, the protocol may reuse the same BTC signature across multiple PoS networks (i.e., multi-staking), thereby maximizing yield. |
The relationship between the Babylon ecosystem and the Babylon Genesis Chain is nuanced and may require clarification.
The Babylon Genesis Chain is a PoS Layer 1 blockchain that plays a central role within the Babylon ecosystem. However, it is not synonymous with the ecosystem itself.
The Babylon protocol refers to a broader framework encompassing multiple Bitcoin-Secured Networks (BSNs) that utilize Bitcoin-based economic security via Babylon.
If a participant joins Babylon as a finality provider and provides finality to the Babylon Genesis Chain, they receive “BABY”, the native token, as a reward.
Finality providers currently serve the Babylon Genesis Chain, where they contribute to finality and receive BABY, the native token, as compensation. Although the Babylon protocol is designed to be extendable to other Bitcoin-Secured Networks (BSNs), finality provisioning beyond the Genesis Chain has not yet been implemented. In the future, other BSNs may adopt the Babylon finality mechanism and offer their own tokens as rewards to finality providers.
In addition, the Babylon Genesis Chain has its own set of validators, who stake BABY and participate in block production and consensus. These validators are also rewarded in BABY for their contributions to the network’s operation.
Item | Details |
Token Name | BABY (Native token of the Babylon Genesis Chain) |
Means of Acquisition 1 | Stake BABY and participate as a validator in block production and validation on the Babylon Genesis Chain |
Means of Acquisition 2 | Provide finality to the Babylon Genesis Chain using BTC as a finality provider |
Primary Use Case 1 | Staking collateral for validator participation |
Primary Use Case 2 | Governance (proposal creation and voting rights) |
Primary Use Case 3 | Network fees (planned in the future) |
Additional Notes | Rewards in other BSNs are typically paid in each BSN’s own native token, not BABY |
Item | Finality Provider | Validator (Babylon Genesis Chain) |
Staked Asset | BTC (non-custodial) | BABY token (non-custodial) |
Primary Role | Provide finality (submit signatures) to BSNs | Block production and validation on Babylon Genesis Chain |
Target Chain(s) | Babylon Genesis Chain and other BSNs | Only the Babylon Genesis Chain |
Reward Token | BABY or BSN-native token (depending on the chain) | BABY token |
Slashing Risk | Signature invalidation and BTC burn (e.g., double signing) | Slashing of staked BABY (e.g., double signing or downtime) |
Staking Method | Declaration of intent via BTC signature (held in a self-managed script; delegation also possible) | On-chain BABY token staking (self-custodied; delegation also possible) |
Based on the above assumptions, this section outlines the key legal issues related to providing or using a Bitcoin staking service such as Babylon.
In particular, the analysis focuses on two core questions:
In the context of BTC staking via Babylon, a key legal issue is whether the provision of BTC as economic security constitutes the “management” or “custody” of crypto assets under Japanese law.
Under custody regulations based on the Payment Services Act, the primary legal criterion is generally understood to be whether the service provider holds the private key required to transfer the user’s crypto assets.
This interpretation is supported by an official public comment issued in connection with the 2019 amendments to the Act:
“If a business operator does not possess any of the private keys necessary to transfer the cryptographic assets of a user, the business operator is not considered to be in a position to proactively transfer the cryptographic assets of the user, and therefore, basically, is not considered to fall under the category of ‘managing cryptographic assets for others’ as stipulated in Article 2, Paragraph 7, Item 4 of the Payment Services Act.”
In this regard, the private key required to transfer BTC is never shared with or transferred to any entity, including the Babylon Genesis Chain or finality providers.
The technical structure of the system is as follows:
This design enables BTC to serve as economic security without transferring control of the private key, ensuring that the BTC remains in the staker’s custody unless slashing conditions are triggered.
Accordingly, Babylon and finality providers would generally not be considered to fall under custody regulations under the Payment Services Act.
However, it should be noted that certain Liquid Staking Protocols may offer services that involve taking custody of users’ private keys. In such cases, those entities may indeed be subject to custody regulations, and a case-by-case legal assessment would be required.
In Babylon, BTC is provided as economic security, and BTC stakers receive compensation while bearing certain risks such as slashing. From this structure, a legal question arises as to whether Babylon might be classified as a “fund” (collective investment scheme) under Japanese law.
Article 2, Paragraph 2, Items 5 and 6 of the Financial Instruments and Exchange Act (“FIEA”) broadly define a “fund” (collective investment scheme) as follows:
(A)Covered Forms of Rights (any of the following): 1. Partnership agreement 2. Silent partnership agreement 3. Investment limited partnership agreement 4. Limited liability partnership agreement 5. Membership rights in a general incorporated association 6. Other similar rights (excluding those established under foreign laws) Note: Items 1–5 are illustrative; “other rights” are interpreted broadly, regardless of legal form. (B)Description of the Scheme (all of the following must be satisfied): ・Investors contribute cash or assets (including crypto assets, per Cabinet Order); ・The contributions are used in a business; and ・Investors have rights to receive dividends or a share in the property derived from that business. (C)Exclusions: The scheme does not apply where all investors are actively and substantially involved in the business (per Cabinet Order requirements); or Where investors are entitled to returns only up to the amount they invested (limited liability form). (D)Foreign Funds: Similar rights based on foreign laws may also be regulated under separate provisions. |
While Babylon might fall within the category of “other similar rights” in (A) above and does not appear to meet the exclusions under (C), it is unlikely to satisfy all of the conditions under (B). Accordingly, it may not constitute a fund under the FIEA, for the following reasons:
From these perspectives, Babylon’s BTC staking mechanism does not appear to meet the definition of a fund under the FIEA.
Babylon allows BTC stakers to delegate their staking authority to finality providers. However, since this process does not involve the transfer of private keys, such delegation is not likely to fall under a fund regulation.
On the other hand, certain Liquid Staking Protocols may offer services that involve taking custody of users’ private keys. In such cases, a careful legal analysis is required to determine whether such schemes meet the definition of a fund under the FIEA, particularly in light of the structure of asset control and contribution.
This section examines the legal and operational issues that may arise when a Japanese crypto asset exchange operator performs BTC staking via the Babylon protocol using assets deposited by users.
Many crypto asset exchanges in Japan provide staking services as part of their business operations.
To our understanding, as long as users do not bear the risk of slashing (i.e., potential loss)2122, such services are generally treated as part of the core business of “receiving deposits of crypto assets” as defined in Article 2, Paragraph 15, Item 4 of the Payment Services Act.
This legal interpretation should remain applicable even when Babylon is used as the underlying protocol—no special legal treatment or additional licensing is expected to be required.
Under Article 60-11, Paragraph 2 of the Payment Services Act and Article 27, Paragraph 3, Item 1 of the Cabinet Office Ordinance on Crypto Asset Exchange Services, crypto asset exchanges in Japan are required to segregate users’ crypto assets from their own assets and hold them in cold wallets.
In most PoS staking systems, private keys used for asset transfers do not need to be moved; rather, a separate validator key is used. This practice is generally considered not to conflict with cold wallet requirements.
In Babylon, there is no concept of a validator key. Instead, staking is performed via cryptographic signatures called Extractable One-Time Signatures (EOTS). Importantly, the private key for BTC remains in the possession of the BTC staker—in this case, the exchange operator—and is never transferred or exposed to third parties.
Therefore, since the exchange does not move or manage private keys externally, Babylon staking is not expected to conflict with cold wallet custody obligations.
A unique practical issue with Babylon staking is that while BTC is used as the staked asset, the rewards are typically paid in the native tokens (i.e., altcoins) of the target PoS network, rather than in BTC itself.
For example, when staking ETH, both the staked asset and the reward are ETH, which poses no legal or operational issues for exchanges that have already registered ETH as a “handled crypto asset” with the Financial Services Agency (FSA).
In contrast, when staking BTC via Babylon, the resulting rewards may be in the form of tokens such as BABY or other native tokens of PoS networks that are not registered as handled crypto assets. This presents a compliance challenge under the Payment Services Act.
Several operational approaches can be considered:
In this approach, the exchange holds the altcoins it receives as rewards and allocates them to users.
While it may be possible to register certain major tokens (e.g., BABY) as handled crypto assets, and some tokens associated with Babylon partner networks (e.g., ATOM, SUI) are already listed in Japan, it is not realistic to file individual registrations for every potential reward token.
Here, the exchange does not custody the reward tokens but transfers them directly to each user’s self-managed wallet. This bypasses the need to register the tokens as handled crypto assets.
However, this approach presents practical challenges: requiring users to manage wallets for a wide range of altcoins is burdensome from both a UX and operational support perspective. It also introduces potential transaction costs and operational risks.
Under this method, the exchange converts the reward altcoins into BTC or JPY (e.g., via a DEX or an overseas partner), and then distributes those converted assets to users as rewards.
While this may raise concerns that the exchange is engaging in crypto asset exchange services involving unregistered crypto assets, such risks may be mitigated through appropriate contractual arrangements.
Specifically, if the agreement with the user clearly states that:
then the exchange’s sale or swap of the altcoins can be viewed as part of its internal process for sourcing rewards, rather than as a crypto asset exchange activity involving third parties.
In this structure, the exchange merely acquires and disposes of unregistered tokens on its own account, which is generally not considered a regulated activity under current law.
In light of the above, under the current regulatory framework, it appears that the most realistic and effective approach for crypto asset exchanges is to structure their operations based on scheme (3).
That said, from the perspective of BSNs, there are concerns about potential ongoing selling pressure caused by continuous liquidation of reward tokens. Therefore, the sustainability of the system as a whole should also be carefully considered in future discussions.
Acknowledgments
In preparing this article, I received valuable input from the teams at Kudasai Inc. and Next Finance Tech Inc., both of whom are well-versed in Babylon staking. I also benefited from informal yet insightful suggestions from individuals involved with the Babylon protocol.
However, any remaining errors or interpretations are entirely my own and do not represent the official views of any specific entity
Disclaimer
The content of this document has not been reviewed by any regulatory authority and represents a general legal analysis based on interpretations currently considered reasonable under applicable Japanese law. The views expressed herein reflect the current thinking of our firm and are subject to change without notice.
This document does not constitute an endorsement of any specific staking mechanism, including Bitcoin staking, the Babylon protocol, liquid staking services, or any related technologies or platforms.
This material is provided solely for informational and blog purposes. It does not constitute legal advice, nor is it intended to be a substitute for legal counsel. For advice tailored to your specific circumstances, please consult with a qualified attorney.
As seen in Ethereum network, staking—the process of locking a certain amount of crypto assets on a blockchain for a set period to contribute to transaction validation (Proof of Stake), earning rewards in return—is gaining traction globally as well as in Japan. Major Japanese crypto asset exchanges now offer staking services, contributing to its expansion. This paper outlines key legal issues related to staking under Japanese law and briefly addresses the concept of restaking, which is a mechanism in which existing staked crypto assets or staking rewards are staked again to earn additional rewards, with the aim of enhancing network security and enabling new services.
Regulatory applicability depends on the manner in which staking is conducted and its legal framework. Relevant regulations include those governing Crypto Asset Exchanges and Funds as referenced and further explained below.Staking one’s own crypto assets remains unregulated under such regulations, therefore, this discussion focuses on cases where a service provider stakes on behalf of users. To summarize the key conclusions in advance:
Staking Structure and Legal Framework | Applicability of Crypto Asset Exchange Regulations / Fund Regulations as per Japanese Law |
Service provider does not receive the user’s private key (only delegation) | No applicable regulations |
Service provider gets the user’s private key |
|
Legal structure: “Custody” | Crypto Asset Exchange regulations apply (registration as a Crypto Asset Exchange) |
Legal structure: “Investment” | Fund regulations apply (registration as a Type II Financial Instruments Business Operator) |
Legal structure: “Lending” | No applicable regulations |
Custody, Investment, and Lending are key legal classifications in the regulatory framework for staking services. While details will be discussed later, these terms can be briefly defined as follows:
✓Custody refers to the management of crypto assets on behalf of users. Possession of private keys is a key factor in determining regulatory applicability of Custody. If structured as Custody, it falls under Crypto Asset Exchange regulations under the Payment Services Act (PSA).
✓Investment refers to a scheme where users contribute funds (including crypto assets) to a service provider, which then utilizes them for business operations (e.g., staking) and distributes profits to the users. If structured as Investment, it falls under Fund regulations governed by the Financial Instruments and Exchange Act (FIEA).
✓Lending refers to an arrangement where users lend their crypto assets to a service provider, which manages the crypto assets at its discretion and returns them after a specified period. If recognized as a Lending agreement, it is generally not subject to PSA or FIEA regulations.
Under Japanese law, Crypto Asset Exchange regulations under the PSA, Article 2, Paragraph 15, apply to the following activities:
Among these, staking is particularly relevant to Item 4., which refers to the Custody services.
Regarding “managing crypto assets on behalf of others” (hereinafter referred to as “Custody”), the Financial Services Agency (FSA) guideline23 states:
“[…] in a case where the business operator is in a state in which the business operator is able to proactively transfer a Crypto-Asset of a user, such as a case where the business operator holds a secret key [Author’s Note: referring to a private key] sufficient to enable the business operator to transfer the Crypto-Asset of the user without any involvement of the user, either alone or in cooperation of an affiliated business operator, such a case falls under the management of Crypto-Assets.”
This indicates that possession of private keys is a key factor in determining regulatory applicability of Custody.
Additionally, staking may also be subject to Fund regulations governed by FIEA (Article 2, Paragraph 2, Item 5). This FIEA applies where users contribute funds (including crypto assets) to a service provider, which then utilizes them for business operations and distributes profits to the users.
If a service provider only receives delegation from users without holding their private keys24, it does not qualify as a Custody activity under the FSA guideline as quoted above and is not subject to Crypto Asset Exchange regulations under the PSA.Additionally, in this case, since users do not contribute funds to the service provider —given that the service provider cannot transfer the crypto assets for business operations without possessing the private key— it does not constitute an “Investment” and therefore, Fund regulations under the FIEA do not apply either.
If a service provider holds the user’s private key, it may be classified as a Custody activity under the PSA. Additionally, depending on the legal structure of the arrangement, the user’s contribution could be considered an “Investment,” making it subject to Fund regulations under the FIEA.
First, if the arrangement is structured as a “Custody,” the provider is deemed to be managing the user’s crypto assets on their behalf. This qualifies as a Custody activity under Crypto Asset Exchange regulations and falls under the Payment Services Act (Article 2, Paragraph 15, Item 4).
If the legal structure is such that the provider receives “Investment” of crypto assets from users, it does not meet the Custody regulation requirement of “managing crypto assets on behalf of others,” as the assets are received for business use rather than for custodial management on behalf of users. Therefore, Custody regulations under the PSA do not apply. However, since the provider uses the contributed funds to operate a business (staking) and distributes the revenue to users, it is likely subject to Fund regulations under FIEA.
If the arrangement is structured as Lending, where the user lends crypto assets to the service provider, which manages them at its discretion and returns them after a specified period, rather than making a Custody (where assets are held and managed on behalf of the user) or an Investment (where assets are contributed with an expectation of return), no specific regulations apply. However, according to the aforementioned FSA guideline25, “The borrowing of Crypto-Assets […] falls under the management of Crypto-Assets […] if a business operator substantially manages a Crypto-Asset on behalf of another person under the name of the borrowing of a Crypto-Asset such that the user can receive the return of the Crypto-Asset borrowed at any time at the request of the user. “
Therefore, regulatory authorities may classify such circumvention schemes as a Custody activity, making them subject to Custody regulations under the PSA.
Thus, even when a service provider holds the user’s private key and conducts staking, the applicable regulations vary depending on the legal structure of the arrangement. However, in practical business operations, the distinction between “Custody”, “Investment” and “Lending” is not always clear. To determine the applicable regulations, it is useful to analyze the staking scheme based on the following factors:
Based on these factors, the conclusions for typical cases are summarized as follows. However, if a case does not fit within these typical scenarios, determining whether it qualifies as Custody service or a Fund Investment can be challenging.
The licenses required for service providers under each scheme are summarized as follows:
Restaking is a scheme where crypto assets that have already been staked are staked again in another protocol.
The demand for restaking arises from two key factors: enhance security of certain decentralized finance (DeFi) protocols and similar services and enabling users to obtain higher yields.
If a DeFi service uses its own Proof of Stake token for validation of transactions and hence its security, its effectiveness may be limited due to low token value or poor distribution and can be open to security vulnerabilities through holding a significant number of the related tokens. Restaking solves this by reusing staked crypto assets (e.g., ETH) to provide the security of major public blockchains like Ethereum.
In return, DeFi services share rewards with crypto assets holders, who also bear slashing risks. This allows holders to earn additional rewards on top of their staking returns, boosting overall yields.
The key legal issues related to restaking under Japanese law include:
Regarding Custody regulations, the applicability of Custody regulations depends on the structure of the restaking service. However, based on the previously mentioned stance of the FSA on Custody, if the crypto assets are managed by a smart contract and the restaking service provider does not have the technical ability to transfer the crypto assets, Custody regulations would not apply.
Regarding Fund regulations, the application of Fund regulations requires that the contributed assets be used to conduct a business. In the case of restaking, if crypto assets are merely locked as a form of collateral to cover potential penalties from slashing, rather than being allocated for business operations, it would not meet the legal definition of an Investment. Therefore, Fund regulations would not apply.
Note that, as with staking, the applicable regulations may vary depending on the specific structure of the restaking scheme.
Japan has enacted and improved crypto regulations since 2017. Japan was once one of the most crypto-friendly nations in the world, but after 2018, it adopted a stricter regulatory stance. It is, however, now becoming more friendly to the Web3 industry again, with an intention to attract foreign investment.
This article provides an overview of cryptoasset regulations in Japan in 2024.
History of Cryptoasset Regulations in Japan
Early Friendly Era | |
February 2014 | MtGox, located in Shibuya, Tokyo, and the largest exchange in the world, went bankrupt. |
March 2014 | Japanese LDP (Liberal Democratic Party, a governing party in Japan) discussed with the government and decided not to regulate virtual currency at that stage but asked the industry to form a self-regulatory organization. |
May 2016 | Japan enacted the first virtual currency act in the world. The act was made as an amendment to the Payment Service Act (“PSA”). The act was friendly to startups and intended to foster the industry. |
April 2017 | The amended PSA stated above was enforced. |
2017 | There were ICO booms all over the world, and the price of crypto went up. The trading volume of Japanese exchanges became number 1 in the world. Many foreign players came to Japan to start their business. |
Era of Stricter Regulation | |
February 2018 | A massive hacking incident, under which approximately JPY 58 billion equivalent NEM was hacked, happened in Japan (Coincheck incident). |
2018-2021 | After the Coincheck incident, the Japanese government tightened the operation of the regulation. Many exchanges received business improvement orders and suspension orders, and the market became shrunk. |
May 2020 | The amended PSA and the amended FIEA were enforced. |
Era that Web3 became a national strategy | |
2021- | The Japanese government’s national growth strategy in 2021 includes the statement that Web3 became one of the national strategies. Under this strategy, the LDP’s Web3 project team has issued policy recommendations titled the Web3 White Paper25in order to foster Web3 every year since 2022. |
June 2022 | Japan enacted one of the world’s earliest stablecoin regulations. The act was made as an amendment of the PSA and the Banking Act. |
2022 | In 2002, there were collapses of Tera Luna, Three Arrows Capital, and the FTX Group. As a result, the global regulatory environment became stricter. However, Japan had already implemented stringent regulations, which proved effective. (*1) Therefore, Japan did not need to change its regulations even after these collapses.
(*1) Even in the FTX Group’s bankruptcy, the assets of FTX Japan’s customers were all preserved because the regulations required 100% of users’ assets to be segregated. |
June 2023 | Stablecoin regulation was enforced. |
May 2024 | DMM Bitcoin was hacked, resulting in a loss of approximately JPY 48.2 billion worth of Bitcoin. However, we have not seen any regulatory tightening in response to this incident at this stage. |
The PSA defines cryptoassets as property value with the following elements:
(i) which is recorded by electronic means and can be transferred by using an electronic data processing system, (ii) which can be used in relation to unspecified persons for the purpose of paying consideration for the purchase or leasing of goods, etc. or the receipt of provision of services and can also be purchased from and sold to unspecified persons acting as counterparties, and (iii) excluding the Japanese currency, foreign currencies, currency-denominated assets, and Electronic Payment Instruments. |
Under the PSA, the Cryptoasset Exchange Service means any of the following acts carried out in the course of trade:
(i) sale and purchase of cryptoassets (i.e., exchange between cryptoassets and fiat currency) or exchange of cryptoassets into other cryptoassets; (ii) intermediary, brokerage, or agency service for the acts described above (i); (iii) management (custody) of fiat currency on behalf of the users/recipients in relation to the acts described above in (i) and (ii) and (iv) management (custody) of cryptoassets on behalf of the users/recipients. |
Sales and purchases of cryptoassets to Japanese residents are not subject to the regulation unless they are conducted “in the course of trade (gyo to shite)”. An act in the course of trade is generally understood to be a repetitive and continuous act vis-à-vis the public. For example, trading in cryptoassets for one’s own investment purposes or taking custody of cryptoassets of a wholly owned subsidiary are not considered acts in the course of trade.
It should be noted that just because your clients are only institutional investors is not considered as it is not in the course of trade.
Whether or not a CESP solicits Japanese residents is also considered an important factor in determining the regulation’s application. The determination of whether solicitation towards residents of Japan is being conducted is made on a case-by-case basis. For instance, actions such as not blocking access to a website from Japan, providing information in Japanese, or introducing products at events in Japan could be considered factors that indicate solicitation towards residents of Japan.
The custodian of cryptoassets shall take the CESP license. According to the FSA guidelines, whether each service constitutes the management of cryptoassets should be determined based on its actual circumstances. Generally, if a service provider can technically transfer its users’ cryptoassets, it falls under the category of the management of cryptoassets. If a service provider does not possess any of the private keys necessary to transfer its users’ cryptoassets, the service provider is basically not considered to manage cryptoassets.
Accordingly, wallet services, such as non-custodial wallets, where the users manage the private key on their own, are not considered to constitute the management of cryptoassets.
An intermediary generally means a factual act that involves efforts to conclude a legal act between two others. Brokerage or agency service means to perform a legal act in one’s own name and for the account or on behalf of another person.
With respect to a purchase and sale agreement of cryptoassets between third parties, the acts of (i) soliciting the signing of the agreement, (ii)explaining the product for the purpose of solicitation, and (iii) negotiating the terms and conditions fall, in principle, under the category of an intermediary.
The mere distribution of product information papers, etc., may not fall under the category of an intermediary and should be considered on a case-by-case basis.
The PSA requires minimum capital, financial requirements, a physical office, a sufficient number of personnel on staff, segregation of assets, an annual audit, a customer identity verification system, accountability to users, protection of person/s’ information, including sensitive information, and, if outsourced, must retain authority. The service provider must be equipped with the systems for adequate operation and legal compliance deemed necessary to operate a Cryptoasset Exchange Service appropriately and securely. Although the applicant must have a minimum capital base of at least JPY 10 million, and it must not be in negative assets, from our experience, the cost of obtaining the license and starting the internet exchange business can be more than JPY 1 billion.
We are often asked by companies interested in entering the Japanese crypto market whether they can start their business by acquiring an already licensed CESP rather than obtaining a new license. The answer is Yes. Regulatory speaking, change of major shareholders is done just ex-post notification and you can start your business after purchasing the already licensed CESP.
The major issue here is that the purchased CESP shall satisfy the governance and compliance levels, which are similar to those a new licensed exchange shall achieve. If one purchases a cheap CESP, which is just having a license but has not done a business actively, to reach these levels might be difficult and time-consuming. Furthermore, if you wish to change the business model or system of the purchased CESP, you must provide an explanation to and obtain approval from the FSA. The cost of purchasing the licensed CESP, combined with this additional expense, can sometimes be comparable to the cost of obtaining a new license. Therefore, careful consideration is necessary.
The PSA requires the users’ cryptoassets to be segregated from the CESP. Further, the CESP shall keep (i) at least 95% of the users’ cryptoassets in cold wallets and (ii) equivalent to 100% minus those kept in the left column of its own cryptoassets in cold wallets. Thus, as a consequence, the CESP shall hold the equivalent of 100% of users’ cryptoassets in cold wallets.
With respect to fiat currency, the CESP shall deposit its users’ fiat currency in a bank account under a different name from where the CESP deposits its own funds.
A CESP must undergo an annual audit of its financial statements and segregation of assets.
Anti Money Laundering law requires CESPs to conduct a know-your-customer of users. Stricter regulations for anti-money laundering came into effect on June 1, 2023. According to the new Travel Rules, when assets over a certain amount are sent by a user, the receiving and sending CESPs must share information about the users. The lack of interoperability in such information-sharing systems has prevented users from sending and receiving cryptoassets between some CESPs.
The regulations applicable to decentralized exchanges (DEX) are not clear. There is an argument that the regulations do not apply to exchanges that are completely decentralized and have no administrator at all, as there is no entity subject to crypto regulations. However, it is necessary to carefully consider whether there is truly no administrator. Further, entities that provide access software to a DEX may be subject to the regulations for being intermediaries.
As stated later in section III. 1, the sale of cryptoassets issued by oneself is subject to crypto regulations. Providing liquidity to a DEX for cryptoassets issued by oneself may also be considered as engaging in the sales of the cryptoassets.
Pure NFTs, such as trading cards and in-game items recorded on blockchains that do not function as payment instruments, are not considered cryptoassets. The FSA states that the distinction between cryptoassets and pure NFTs is as follows:
(i) the issuer of the NFTs prohibits its use as a payment instrument by technical feature or by agreement
(ii) the quantity and price of the NFTs are not suitable as a payment instrument (specifically, one NFT costs more than ¥1,000 or the total number of the NFTs issued is less than 1 million).
Generally speaking, pure NFTs are not regulated in Japan. Please, however, note that whether NFTs are considered as “pure” NFTs needs careful discussion. For example, if an NFT gives some dividend or economic benefit, it might be considered as a security. Further, an NFT, which is linked to real-world assets, might require a discussion of whether regulation of real assets may apply.
Japan was one of the first countries in the world to establish stablecoin regulations. Stablecoins pegged to fiat currency are defined as electronic payment instruments and require a license different from CESP to offer the related service.
Other stablecoins that adjust their value through algorithms could be regulated as cryptoassets or securities. Stablecoins classified as cryptoassets are subject to crypto regulations, while stablecoins classified as securities are subject to securities regulations (FIEA).
ICO (Initial Coin Offering) is an act of issuing and selling tokens to raise fiat currency or crypto assets from the public. ICO is regulated in Japan. The applicable regulations depend on the legal nature of the issued tokens. If the tokens are considered securities, the token issuance will be regulated by the FIEA. If the tokens are considered cryptoassets, the token issuance will be regulated by the PSA.
The issuance of new cryptoasset-type tokens in Japan is generally done by IEO (Initial Exchange Offering). IEO is an act of raising fiat currency or cryptoassets by an entity entrusting the sales of tokens to a licensed CESP. In the case of IEO, if the issuer itself does not conduct sales activity, the issuer does not need to take the crypto exchange license. If, however, the issuer itself wants to conduct sales activity for its new tokens, it needs to have a crypto exchange license, which requires significant cost and time compared to IEO. Several IEO projects have already been launched in Japan.
The IEO process requires examinations by the exchange, JVCEA, a Japanese self-regulatory organization, and the FSA. The examination checks the feasibility of the project for which the funds will be used, the financial soundness of the issuer, and other factors.
SAFT (Simple Agreement for Future Tokens) is a way to raise funds in exchange for the right to purchase tokens to be issued in the future. SFAT targeting Japanese residents is considered to be subject to fund regulation or crypto regulation, depending on the legal nature of the agreement. However, both regulations do not apply unless the act is done in the course of trade, so we may argue that entering into a SAFT with limited numbers of specific persons, such as business partners who will contribute to developing projects, should not be regulated.
SAFE (Simple Agreement for Future Equity) with token warrant is subject to general equity investment regulations, depending on the attributes of involved entities and investors.
Japanese entities sometimes use J-KISS, a Japanese convertible equity, with a side letter that provides tokens.
Generally speaking, we believe staking service for POS tokens is not regulated in Japan. For example, staking one’s own cryptoassets or becoming a validator for ETH is not regulated in Japan.
Not all staking services, however, are exempted from the regulation. If service providers manage the private keys of users’ cryptoassets (we understand some exchanges provide those services), custody regulation may apply. In addition to managing private keys, if the service providers distribute rewards as well as slashing penalties to the users, fund regulations might apply.
We understand that there are some NFT projects that say that they sell NFTs for crypto, and purchasers can stake NFTs, and can get rewards. We understand fund regulation might apply to such cases, especially in cases where staking does not have any actual usage for providing security.
In crypto lending services, a service provider borrows cryptoassets from users for a certain period of time and pays a lending fee in exchange. No regulation applies to that lending because the Money Lending Business Act regulates money lending, but it does not deem cryptoassets as money.26
It should be noted that crypto custody regulations may apply in cases where the service is considered as custody, not lending, even if a service is titled as crypto lending. One factor that distinguishes lending and custody is whether users can withdraw their assets at any time (deposit) or whether there is a specific required time of non-withdrawal (lending).
Mining cryptoassets requires large amounts of electricity. Thus, mining appears to be regulated in some countries, such as Kazakhstan27Regulation of mining in certain areas in Russia is also being discussed28. In Japan, mining itself is not regulated.
A business that collects money from the public to conduct mining operations and then distributes the proceeds from mining to the customers may be regulated under the FIEA as a fund.
Schemes that one sell mining machines, accept deposits of the machines, and promise to pay fees for the mining results may also be regulated under the Act on Deposit Transactions. If the Act on Deposit Transactions is applied, the business must obtain confirmation from the Prime Minister, but it is said that to get such confirmation is nearly impossible. Creating a scheme to avoid such regulation is important.
principle, classified as miscellaneous income. Miscellaneous income is income that is neither interest income, dividend income, real estate income, business income, employment income, retirement income, forestry income, transfer income, or temporary income. The tax rate for miscellaneous income ranges from 5% to 45%, depending on the amount of total income. The maximum tax rate is about 55% when we calculate income tax as well as residential tax and special reconstruction income tax.
Profit generated by cryptoassets transactions is subject to corporate tax which is about 30% depending on the amount of income and how big a company is.
Cryptoassets for which there is an active market must be valued using the mark-to-market method at the end of the fiscal year and are taxable even if companies do not sell them.
This unrealized gain tax treatment became a huge issue in Japan, and many Web3 companies left Japan.
In 2022, the Japanese government decided to reform this unrealized gain tax, and now the tax is not levied if an issuing company of tokens continues to hold its tokens with certain technical transfer restrictions.
In 2023, another tax reform was proposed and approved by the government. Under the reform, an unrealized gain tax is not applied if a company holds tokens with a certain transfer restriction, even in the case that tokens are issued by other entities (including Bitcoin and Ether etc.)
Disclaimer
The content of this article has not been verified by the relevant authorities or organizations mentioned herein and represents only a reasonable interpretation of their statements. Our interpretation of laws and regulations reflects our current understanding and may change in the future. This article is not intended to be legal advice and provides a summary for discussion purposes only. If you need legal advice on a specific topic, please feel free to contact us.
EOD
This article discusses the structure of EigenLayer, which has recently gained rapid attention in the DeFi space, and the applicable regulation on it under Japanese law.
Our firm is a law firm well-versed in the Web3 domain, and we have published numerous articles in both Japanese and English on legal issues related to the Web3 field29. In May 2024, we published a Japanese article titled “Structure of Restaking Services such as EigenLayer and Japanese Law30.”
While the Japanese version of the article provides a more detailed analysis, this article summarizes the conclusions of the Japanese version to facilitate easy understanding for overseas entities considering offering restaking services in Japan.
The Structure of Restaking in EigenLayer
EigenLayer is a service designed to ensure secure execution for programs running outside of the Ethereum Virtual Machine (EVM) by using ETH.
For instance, when a DeFi application that uses the Ethereum blockchain consists of parts that operate within the EVM and parts that do not, the security for the EVM parts is guaranteed by the Ethereum blockchain. However, the parts that run outside the EVM are not covered by the security of the Ethereum blockchain, making them vulnerable. The traditional approach to this issue has been to issue native tokens for that application, but this comes with several problems:
EigenLayer aims to provide a solution to these problems.
In simple terms, EigenLayer “reuses” ETH that is already staked on Ethereum to provide security to services built on EigenLayer (Actively Validated Services, or AVS). For example, consider an AVS that periodically surveys numerous crypto exchanges and DeFi protocols to collect token price information and calculate their average values. In this case:
A key feature is that ETH staked for the regular Proof of Stake mechanism on Ethereum can also be used as collateral for multiple AVS, allowing operators to earn additional rewards. Furthermore, users who are not operators can deposit their ETH, etc. into EigenLayer, restake it through selected operators, and receive a share of the rewards that operators earn from the AVS. The advantage for users is that they can earn multiple layers of rewards through EigenLayer restaking compared to simple ETH staking.
Liquid Restaking
In addition, external entities offer a service related to EigenLayer known as Liquid Restaking. This service involves users depositing their ETH with a liquid restaking provider, who then stakes the ETH on Ethereum and restakes it through EigenLayer once the minimum staking unit of 32 ETH is accumulated. In this case, users only interact with the liquid restaking provider, while the provider handles transactions with EigenLayer. This arrangement frees users from the responsibility of selecting operators. Liquid restaking services thus play an important role in providing users with the opportunity to generate revenue through EigenLayer.
Restaking and Japanese Law
When considering restaking services such as EigenLayer under Japanese law, it is primarily necessary to evaluate the applicability of:
If the act of depositing ETH, etc. into EigenLayer is viewed as the entrustment of crypto, the custody regulations under the Crypto Act may apply. However, if the deposit is made to a smart contract and the smart contract technically prevents EigenLayer, the AVS, the operators and other people except for users to transfer the ETH, etc., we believe the custody regulations would not apply.
FIEA regulates funds that collect money, use such money for some kinds of investment or some business activities, and distribute the profits to investors. There is a concern about whether the fund regulations under the FIEA apply to the mechanism where EigenLayer receives deposits of ETH, etc., operators provide security to the AVS in return for rewards, and a portion of these rewards is distributed to users, who also bear the risk of penalties such as slashing. However, if the deposited ETH, etc. is not used for investment or business activities but merely locked in a smart contract as a form of collateral to address penalties like slashing, we believe that the fund regulations under the FIEA would not apply.
In restaking services such as EigenLayer, users may receive points32.as rewards. These points might lead to future airdrops. The potential applicability of the UPMR, which prohibits excessive premiums provided in connection with transactions of goods and services, needs to be considered. Under UPMR, premiums refer to (1) economic benefits such as goods or money that are provided (2) as a means to attract customers, and (3) in connection with transactions. In this respect, users of restaking services likely view these points as part of the rewards associated with restaking, and the high yields might incentivize them to restake. Therefore, these points can be seen as part of the primary transaction, not as “premiums” provided in connection with the transaction, implying that the UPMR might not apply.
Liquid Restaking and Japanese Law
Liquid restaking providers, being external entities, likely operate under various structure. It is necessary to evaluate the applicability of:
If the act of depositing ETH for liquid restaking is deemed as custody, the custody regulation under the Crypto Act may apply. Whether liquid restaking providers manage private keys is a critical issue. We believe, however, it seems that most liquid restaking providers do not own private keys and thus the custody regulation do not apply.
There is a concern about whether issuing Liquid Restaking Tokens upon depositing ETH constitutes crypto exchange. Legally, if tokens are issued as proof of deposit, it would not be considered trading or exchange under the Crypto Act, and thus, the trading and exchange regulations would not apply.
Fund regulations must also be considered for liquid restaking providers. Key considerations include how private keys are managed. If the smart contract ensures that the deposited ETH is used solely as collateral and cannot be otherwise utilized, we believe the operation may not be classified as a fund. Conversely, if the smart contract is not properly set up and allows the provider to use the private keys and crypto assets, the operation may be subject to fund regulations.
Disclaimer
The content of this article has not been confirmed by the relevant authorities or organizations mentioned in the article but merely reflects a reasonable interpretation of their statements. The interpretation of the laws and regulations reflects our current understanding and may, therefore, change in the future. This article does not recommend the use of staking, liquid staking, liquid restaking, EigenLayer or LIDO, etc.. This article provides merely a summary for discussion purposes. If you need legal advice on a specific topic, please feel free to contact us.
DePIN (pronounced ‘dee-pin’) stands for Decentralized Physical Infrastructure Network. While there is no definitive conclusion on what DePIN exactly is, according to ChatGPT, it can be described as follows:
DePIN, which stands for Decentralized Physical Infrastructure Networks, refers to networks that leverage blockchain technology to develop, maintain, and operate physical infrastructure in a decentralized manner. These networks use crypto tokens to incentivize individuals and organizations to contribute resources such as data storage, wireless connectivity, computing power, and energy. |
In recent years, DePIN has become a major topic in the Web3 industry, with globally renowned projects such as Hivemapper, Helium, and Filecoin. In Japan, the number of Hivemapper users is increasing, and the country’s largest power company, Tokyo Electric Power Company, has launched a DePIN game called PicTrée, further highlighting the growing interest in DePIN. A summary of this game is provided for reference in section III below.
Our firm is a law office well-versed in Web3 and has addressed various legal issues related to Web3 under Japanese law in numerous articles written in Japanese. Although DePIN has recently garnered attention in Japan, it seems that adequate legal scrutiny has not yet been conducted. Therefore, to support the business development of DePIN in Japan, we have compiled the Japanese article33. While the Japanese article contains a more detailed analysis than this English article, this English article is designed for overseas businesses considering offering DePIN in Japan. It summarizes the conclusions of the Japanese article to facilitate easy understanding of the discussion
There are various types of DePIN projects. Therefore, the laws potentially applicable when introducing DePIN to residents of Japan may vary depending on the project. Here, we considered the introduction of the current major DePIN projects listed in section I for residents of Japan.
In conclusion, for these projects, it is necessary to consider the following regulations:
1. The crypto regulation part of the “Payment Services Act,” which establishes regulations related to crypto exchange registration, (hereinafter referred to as the “Crypto Act”).
2. The Act against Unjustifiable Premiums and Misleading Representations (hereinafter referred to as the “Premiums and Representations Act”), which regulates the provision of premiums attached to the purchase of goods or services.
3. The Act on Specified Commercial Transactions, which regulates transactions that induce consumers to purchase equipment by offering benefits such as business opportunities.
4. The Radio Act.
5. The Telecommunications Business Act.
6. Other laws related to the import and sale of equipment.
The summary of our current analysis is as follows:
(1) Crypto Act In Japan, when engaging in the “selling and buying,” “exchanging,” or “managing” of crypto as a business, regulations under the Crypto Act apply, and registration as a crypto exchange business is required. These regulations apply not only to crypto exchanges but also to ICOs and IEOs. Regarding the relationship between DePIN and the “selling and buying” or “exchanging” of crypto, many projects have a mechanism where users receive tokens as a reward for contributing to DePIN. Even if these tokens are considered crypto, the provision of tokens as a reward for contributions to the project does not constitute “selling and buying” or “exchanging,” and therefore, the Crypto Act does not apply. Concerning the relationship between DePIN and the “managing” of crypto, if tokens are granted to a user-owned address on the blockchain (where the user manages the private key), it is not considered that the DePIN operator is “managing” the crypto, and thus, the Crypto Act regulations do not apply. On the other hand, if the operator holds tokens granted to the user (the operator manages the private key), registration as a crypto exchange may be required. Therefore, to ensure that it is not considered as “managing” the crypto, it is necessary to send rewards to the user each time they occur. It is desirable to use a blockchain where even small rewards can be sent with low gas fees. If usage fees are paid by credit card, resulting in tokens being burned and mined, this does not constitute the “selling and buying” of crypto. In DePIN, it is common to list tokens granted as rewards to users to provide trading opportunities. In this case, for the exchange listing these tokens to sell crypto to Japanese residents, registration as a crypto exchange is required. On the other hand, there are no regulations that apply merely to users of the crypto exchange. (2) Premiums and Representations Act In Japan, attaching high-value premiums to the purchase of goods or services is regulated by the Premiums and Representations Act. For example, if premiums are uniformly provided to all purchasers, they are limited to 20% of the purchase price. If provided through a lottery, they are limited to the lesser of 20 times the purchase price or 100,000 yen, and also must not exceed 2% of total sales. When users receive tokens as a reward for contributing to DePIN, these tokens are considered compensation for contributions and are not subject to the premium regulations under the Premiums and Representations Act. (3) Act on Specified Commercial Transactions Some DePIN projects require users to purchase specific equipment to participate in the project. For businesses that involve (i) the sale of goods or the provision of services (including brokerage thereof), (ii) the inducement of users by presenting a business opportunity that provides rewards, and (iii) the imposition of the burden of purchasing necessary equipment for users to carry out the business, regulations such as the obligation to provide written documentation are imposed. (4) Radio Act Many of the devices used in DePIN are likely to emit radio waves for wireless communication. To use these devices, a license under the Radio Act is required unless they bear a Technical Conformity Mark (GITEKI mark). It is effectively necessary to use general-purpose equipment that already has a GITEKI mark or to obtain the GITEKI mark for specific equipment. (5) Telecommunications Business Act For projects like Helium that involve setting up hotspots to connect to the internet and earn rewards, users may need to submit a notification under the Telecommunications Business Act. This requirement makes it difficult to carry out such DePIN in Japan. (6) Other Laws Related to the Import and Sale of Equipment When importing or selling specific equipment, laws such as the Electrical Appliances and Materials Safety Act, the Consumer Product Safety Act, the Household Goods Quality Labeling Act, and the Product Liability Act must be considered. |
In April 2024, “PicTrée,” a GameFi demonstration experiment by the Singapore-based GameFi company Digital Entertainment Asset (DEA) and Tokyo Electric Power Company Power Grid Inc., was launched.
“PicTrée” is a GameFi project where game users receive rewards for taking photos of utility poles and manholes. Utility poles and manholes require continuous maintenance and inspections, which incur significant costs. In this experiment, game players take photos of the current state of utility poles and manholes. Based on these images, the power company determines whether inspections or repairs are necessary, aiming to reduce costs while maintaining safety.
Similar to Hivemapper, this DePIN project allows participants to contribute to society by taking photos and receiving rewards. It is a more accessible DePIN project, as it can be participated in using one’s smartphone and a free app.
Overview of the PicTrée Mechanism 1. Team Division: Users are divided into three teams: “Ampere,” “Volt,” and “Watt.” 2. Points: Users take photos of utility poles and manholes. Each time a user take photo of utility poles or manholes, the ownership of that utility poles or manholes can change to a different team. Additionally, by using game items to connect the utility pole or manhole to other utility poles or manholes of the same team, the team earns points. 3. Rewards: Users receive rewards based on their performance within the team, which can be in the form of Amazon gift cards or tokens. The winning team also receives team rewards. 4. TEPCO’s Benefit: Through these photos, Tokyo Electric Power Company can determine if maintenance or inspections are needed for the utility poles, thereby reducing maintenance costs. |
Game Description and Source of Diagram: Digital Entertainment Asset Pte. Ltd. Press Release, March 4, 202434 (Translated by So & Sato Law Offices)
Disclaimer
The content of this article has not been confirmed by the relevant authorities or organizations mentioned in the article but merely reflects a reasonable interpretation of their statements. The interpretation of the laws and regulations reflects our current understanding and may, therefore, change in the future. This article does not recommend the use of DePIN or the purchase of DePIN equipment. This article provides merely a summary for discussion purposes. If you need legal advice on a specific topic, please feel free to contact us.