DeFi and the Law – LIDO and Liquid Staking under Japanese Law
In 2019, Andreessen Horowitz predicted that in the not-too-distant future every company will be a FinTech company. Fast-forward to today, and most large companies embed financial services into their products to streamline the customer journey and increase their lifetime value.
Embedded finance typically covers the following services:
Generally speaking, there are three different types of entities involved in embedded finance – brands, enablers, and license holders.
| Brands | Non-financial services companies that embed financial services into their platforms and applications to improve the user experience and increase their lifetime value. |
| Enablers | Companies acting as the middle layer between brands and license holders. |
| License Holders | Financial services companies that are registered with or licensed by the Financial Services Agency (FSA) |
Historically, enablers and license holders have been largely identical in Japan. Yet, there is no particular reason why this should not change. In particular, the amended Act on the Provision of Financial Services is likely to bring new momentum to the FinTech industry as it allows financial intermediaries to provide services across different sectors with a single registration.
For brands the upcoming changes mean that they will be able to embed different types of financial services much easier, which in turn will drive demand for enablers connecting them smoothly with different license holders.
The type of license depends on the kind of services the license holder intends to provide. In most cases one of the following licenses is required:
One example that might be different from other jurisdictions is to the provision of lending services in online shops. Depending on the type of lending services different licenses are needed. A careful analysis is therefore necessary.
If the license holder, for example, makes the payment on behalf of the buyer by granting an instalment loan, this is considered an ‘instalment sale’ which falls under the supervision of the Ministry of Economy, Trade and Industry. If the license holder, however, lends the money to the buyer, and the buyer uses that money to pay the shop, lending regulations apply, and the license holder falls under the supervision of the Financial Services Agency.
A brand only needs a license if it acts as an intermediary for financial services. ‘Intermediation’ under Japanese laws is understood broadly and covers any act that furthers the execution of financial contracts. If a brand’s application, for example, seamlessly integrates financial products, this is generally considered an intermediation of financial services.
On the contrary, the introduction of financial products does generally not require a license. If a user is forwarded to the license holder’s website to purchase financial products, for example, the brand is not regulated.
Until this year, the intermediation of different kinds of financial services required different licenses. The intermediation of banking services required a banking agent license, the intermediation of securities services required an intermediation of financial instrument license and so on. For the intermediation of different types of financial products, the brand therefore needed different licenses. From mid of this year, this will change however, and a single license will be sufficient.
If an enabler provides intermediary service as described in the previous section, it has to apply for an intermediation license.
If an enabler, however, only provides a software solution connecting the brand with the license holder a license is not required.
Depending on the exact service, companies may or may not be subject to license requirements in Japan. At a very high level the regulatory environment is as follows:
A more detailed overview can be found in the following section.
As mentioned above, the license requirements differ considerably depending on what kind of service is carried out. A careful case-by-case analysis is therefore necessary.
Instruction by brand
| brand | enabler | license holder | |
| service provided | brand instructs user’s bank to transmit money to brand’s account for purchasing goods or services | provides API for instruction | money transfer |
| applicable laws | not regulated | not regulated | Banking Act (BA) or Payment Services Act (PSA) |
| license/registration requirement | not regulated | not regulated | banking license under BA or money transmitter license under PSA |
Instruction by third party
| brand | enabler | license holder | |
| service provided | – | instructs user’s bank to transmit money to brand’s account | money transfer |
| applicable laws | – | BA or not regulated | BA or PSA |
| license/registration requirement | – | registration as electronic payment services provider under BA if instruction is given to bank not regulated if instruction is given to money transmitter | banking license under BA or money transmitter license under PSA |
Payment by third party (performance by user at the time enabler receives payment)
| brand | enabler | license holder | |
| service provided | entrusting the collection of payment to the enabler | receiving payment from user and making payment to brand (performance by user under the agreement with brand at the time enabler receives payment) | – |
| applicable laws | – | not regulated | – |
| license/registration requirement | – | not regulated | – |
Money transmission (not related to the purchase of goods or services)
| brand | enabler | license holder | |
| service provided | brand instructs user’s bank to transmit money to another person’s account | – | money transfer |
| applicable laws | BA or not regulated | – | BA or PSA |
| license/registration requirement | registration as electronic payment services provider under BA if instruction is given to bank not regulated if instruction is given to money transmitter. | – | banking license under BA or money transmitter license under PSA |
Inhouse instalments
| brand | enabler | license holder | |
| service provided | brand provides installment loan to user to finance purchases | – | – |
| applicable laws | Installment Sales Act | – | – |
| license/registration requirement | not regulated | – | – |
Credit purchase brokerage
| brand | enabler | license holder | |
| service provided | brand intermediates advance payment and installment payment from license holders | – | license holder makes advance payments to brand and receives installment payments from user |
| applicable laws | not regulated- | – | Installment Sales Act |
| license/registration requirement | not regulated | – | registration as credit purchase brokerage business and in cases where the amount is less than JPY 100,000 registration as small-amount credit brokerage business |
Loan affiliated sales
| brand | enabler | license holder | |
| service provided | brand intermediates loan and then jointly and severally guarantees the loan payment | – | license holder provides loan to user to finance purchase in brand’s online shop |
| applicable laws | Installment Sales Act, BA or Money Lending Business Act (MLBA) or Financial Services Act | – | BA or MLBA |
| license/registration requirement | brands must comply with some duties under the Installment Sales Act (no license/registration) intermediaries of loans must obtain a bank agency business license under BA or register as money lending business under the MLBA or as financial services intermediary under Financial Services Act | – | banking license under BA or registration as money lending business under MLBA |
Affiliated loan
| brand | enabler | license holder | |
| service provided | provides access to loan products in its online store | – | license holders provides loan to user to finance purchase in brand’s online shop |
| applicable laws | BA or MLBA or Financial Services Act | – | BA or MLBA |
| license/registration requirement | intermediaries of loans must obtain a bank agency business license under BA or register as money lending business under the MLBA or as financial services intermediary under Financial Services Act | – | banking license under BA or registration as money lending business under MLBA |
| brand | enabler | license holder | |
| service provided | provides interface for investments in securities through app | – | investment into securities |
| applicable laws | Financial Instruments and Exchange Act (FIEA) | – | FIEA |
| license/registration requirement | if brand is a financial institution, it must be registered as a financial institution engaging in the investment advisory and agency business; it is not allowed to use a financial services intermediary under the FIEA if the brand is not a financial institution, it can act under the investment advisory business or as a financial instruments intermediary business under the FIEA or a financial services intermediary business under the Financial Services Act | – | investment business under the FIEA |
| brand | enabler | license holder | |
| service provided | provides access to insurance products in its online store | – | provides insurance products |
| applicable laws | Insurance Business Act or Financial Services Act | – | Insurance Business Act |
| license/registration requirement | registration as insurance agent under Insurance Business Act or financial services intermediary under Financial Services Act | – | insurance business license or small insurance business license |
| brand | enabler | license holder | |
| service provided | provision of withdrawals and deposits through the app | – | deposit |
| applicable laws | BA or Financial Services Act | – | BA |
| license/registration requirement | permission for banking agency business under BA or registration as financial services intermediary business under Financial Services Act | – | banking license |
Debit cards issued by large companies
| brand | enabler | license holder | |
| service provided | issuance of debit cards linked to bank accounts | – | deposits |
| applicable laws | BA or Financial Services Act | – | BA |
| license/registration requirement | permission for banking agency business under BA or registration as financial services intermediary business under Financial Services Act | – | banking license |
Debit cards issued by money transmitters
| brand | enabler | license holder | |
| service provided | issuance debit cards linked to money transmitters | – | transfers |
| applicable laws | PSA | – | PSA |
| license/registration requirement | not regulated | – | registration as money transmitter under PSA |
EOD
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