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In this article, we will introduce AI agents, which have been gaining popularity since 2025, by explaining (1) what an AI agent is, (2) what Web3 AI agents are, and (3) the legal issues surrounding AI agents.

Because AI agents can take over any job, when considering the relationship between AI agents and the law, it is necessary to consider legal issues for all the jobs they perform. However, since it is difficult to cover all of this in a blog, this article first introduces the basic ideas for considering legal issues related to AI agents, and then discusses their relationship with regulation, focusing on financial regulation in particular.

However, we believe that this approach to financial regulation will also be useful to a certain extent when considering legal issues related to other AI agents.

I. Overview of AI Agents

1 What is an AI Agent?

An AI agent is generally an artificial intelligence system that autonomously performs specific tasks. It is capable of processing data from the environment, learning and making decisions as needed, and carrying out tasks without human instruction.
Generally, an AI agent has the following elements:

This allows AI agents to perform repetitive tasks and make complex decisions on behalf of humans.
AI agents are currently attracting a great deal of attention as they are expected to transform our lives and how we do business.
For example, AI agents are expected to be used in the following applications:

AI agents have the potential to enrich our lives and make businesses more efficient, thanks to their personalization and autonomy, and these applications are areas where further advancements are expected in the future.

2 Specific examples of AI agents

The following are some specific examples of AI agent use both in Japan and overseas.

3 Web3 AI Agents

AI agents are said to be compatible with Web3. The integration of Web3 and AI agents is expected to create new possibilities, such as the following:

One example of a Web3 AI agent that has attracted global attention is AI16Z (ai16z), a decentralized AI investment fund built on the Solana blockchain that utilizes AI agents to autonomously conduct investment activities.

The name ai16z is a play on Andreessen Horowitz (a16z), a well-known Silicon Valley VC, but ai16z and a16z are unrelated.However, on October 27, 2024, Marc Andreessen, one of the founders of a16z, posted “GAUNTLET THROWN” on X (formerly Twitter) and mentioned the T-shirt worn by ai16z’s main avatar, which caused the name of ai16z to spread rapidly¹.

Furthermore, in early January 2024, ai16z’s market capitalization temporarily exceeded 300 billion yen, growing more than 100 times in three months. As a result, by early January 2025, the company had become a hot topic worldwide and in the case of a personal injury accident was also a major topic of discussion on AI agents on Japan’s X (formerly Twitter).However, perhaps due to overly high expectations, the price has fallen sharply, with the market capitalization falling to around 50 billion yen, indicating extremely speculative price movements.

II. Summary of the legal part of this paper

III. Basic Concepts of AI Agents and Law

1 When considering regulations, first consider how similar actions would be handled if a person were to commit them.

The “agent” in AI agent is translated as “representative” in Japanese. Services called AI agents usually refer to entities that perform specific tasks “on behalf of” humans, even if they do not fall under the strict legal definition of a “representative.”
When considering regulations that may apply to AI agents, consider the following steps:
(i) Consider what legal issues would arise if a human were to perform a similar act.
(ii) Then, consider whether any regulations would be imposed on users if they were to perform such acts using AI.
(iii) Consider whether any regulations would be imposed on businesses that provide the AI ​​to users.

2 Regulation is directed at people and corporations, not at AI agents themselves

As mentioned above, AI agents are sometimes translated as “agents,” but since they are neither people nor corporations, under current law, AI agents themselves are not subject to regulation. Instead, the natural persons and corporations that use or provide them are.

In relation to this “natural persons and corporations are subject to regulation,” particularly in the context of DAOs, if an AI agent can be said to operate completely autonomously and without human involvement, the question arises as to whether legal regulations would not apply in the first place. However, since it is often unclear whether there are no operators who are completely subject to regulation, we believe that careful consideration is necessary².

3 There are currently no laws regulating AI agents in general.

Currently, there are no laws that generally prohibit the provision or use of AI agents, so whether or not the current regulations that apply to natural persons and legal entities apply to each individual act must be considered.

4 AI itself does not become the subject of rights and obligations

In relation to point 2 above, even if we translate “agent” as “representative,” AI is neither a natural person nor a legal entity, and AI itself cannot be the subject of rights or obligations.
Therefore, for example, when an AI agent makes a mistake, the AI ​​itself is not liable, but the user or the AI ​​agent provider is.

IV. Relationship between AI agents and users, and between AI agent providers and users

1 Relationship between AI agents and users

AI agents are automating a variety of tasks.
First, when a person delegates part of a task to another person, a contract of the following form is concluded.

On the other hand, under current law, the relationship between humans (users) and AI agents is merely that between humans and the software and hardware (that construct the AI ​​agent) and is not a contractual relationship; it is merely a relationship in which humans are effectively using the AI ​​agent.

2 Relationship between AI agent providers and users

AI agents are generally developed by companies, and many users either receive ready-made AI agents from those companies or commission the development of AI agents to those companies.
This relationship can be summarized as follows:

V. AI Agent Malfunctions and Responsibilities

1 Damages caused to users of AI agents

If a user suffers damage due to a malfunction of an AI agent, the following liability claims and defenses may be taken:

2 AI agent ordering errors (unauthorized ordering or unauthorized representation)
(i) The problem of unauthorized human representation

For example, if a person asks another person to purchase Bitcoin and gives them authority to do so, but the agent ends up purchasing Ethereum, this will be considered unauthorized agency, and in principle the effects of the contract will not belong to the principal.
The main legal issues that arise when unauthorized agency occurs are as follows:

(ii) Unauthorized ordering or unauthorized representation by AI agents
① In the case of AI agents managed by users

Since AI agents are programs that operate based on user instructions, orders placed by AI agents are generally considered to be an expression of the user’s intention, and the effects of such orders are also considered to belong to the user.
However, there are also cases where an AI agent places an order that differs from the user’s true intention, and in such cases, the question arises as to whether the effects of the order belong to the user.
In this regard, it may be necessary to consider whether the user can revoke the expression of intention as a “mistake” (Article 95 of the Civil Code). There are two cases of mistake:

(a) When the user’s instructions and the order result match
For example, if a user intends to “purchase cryptocurrency at the discretion of an AI agent” and issues such instructions, resulting in the purchase of an unexpected type and quantity of cryptocurrency, since the user’s intention to “purchase cryptocurrency at the discretion of an AI agent” and the result match, it can be said that there is a user intention corresponding to the expression of intention (the AI ​​agent’s order), and unless the other party is informed that “the user thought the AI ​​agent would operate within the user’s expectations,” it is likely to be difficult to cancel the order due to mistake (paragraph 2 of the same article).

(b) When the user’s instructions and the order result do not match
On the other hand, if the user gives specific instructions specifying the type and quantity, and the AI ​​agent places an order for a different type and quantity, it seems theoretically possible to argue that the cancellation was due to mistake, on the grounds that the user’s intention (the AI ​​agent’s order) does not correspond to the expression of intention.

However, if such cancellations were easily permitted, it would likely seriously undermine the safety of transactions. Therefore, Article 95, Paragraph 3 of the Civil Code stipulates that cancellations cannot be made if the user is “grossly negligent.” For example, if there is a setting error or improper management of the AI ​​agent, the user could be found to be “grossly negligent” and the cancellation could be denied. In the case of orders placed by a company, it may even be considered “gross negligence” if the user does not check the specific order contents themselves after using the AI ​​agent.

(c) Special provisions for electronic consumer contracts
When consumers place orders using AI agents, Article 3 of the Electronic Consumer Contract Act (Act on Special Provisions of the Civil Code Concerning Electronic Consumer Contracts) is likely to apply. This Act, because of the high incidence of ordering errors in internet transactions, allows cancellation in the following cases in principle:

Even when using an AI agent, if a consumer conducts a transaction using a computer in accordance with the procedures displayed on a computer screen by a business operator, this will be considered an electronic consumer contract (Article 2, Paragraph 1 of the same Act), and it is considered that this article also applies to transactions using an AI agent.
However, this exception will not apply if a business takes measures to request confirmation of the consumer’s intention, as described below.

Furthermore, if a consumer uses an AI agent to conduct a transaction without taking the necessary confirmation measures, this may fall under the provision of the same article, “where the consumer expresses their intention to the business operator that they do not need to take such measures,” and the special provisions may no longer apply. In such cases, cancellation due to mistake is generally not permitted.

②In the case of an AI agent provided by another party

If an AI agent provided by another party is used and the AI ​​agent conducts a transaction that the user did not intend, the issue of unauthorized agency by the AI ​​agent provider may arise. When
the AI ​​agent provider is an unauthorized agent, the following particular issues arise regarding the success or failure of apparent agency.

Therefore, the question arises as to what constitutes a “legitimate reason” for the trading partner. If the AI ​​agent is given, for example, a password or authority to place an order and uses it to place an order, the other party will basically have no choice but to believe that a legitimate transaction has been made, and it would appear that apparent agency would be established.

3 Regarding cases where the use of AI agents causes harm to others (e.g., self-driving cars)

If another party suffers damages related to the malfunction of an AI agent, the provider of the AI ​​agent or the user of the AI ​​agent may be liable for damages.This point is particularly noteworthy as an example of the use of AI agents, and autonomous driving is a typical use case in which the use of AI agents could cause harm to others. In autonomous driving, an AI agent will be responsible for driving the car, but legal liability in the event of an accident may differ between when a human is driving and when an AI is driving.

(i) When a human is driving:
①In the case of a personal injury accident

In the event of a personal injury accident, the car owner or other operator (a person who operates a car for themselves) will be held liable under Article 3 of the Automobile Liability Insurance Act (Automobile Liability Insurance Act) in addition to tort (Article 709) of the Civil Code. When claiming damages under Article 3 of the Automobile Liability Insurance Act, the victim does not need to prove the driver’s negligence. Under Article 3 of the Automobile Liability Insurance Act, the operator can be exempt from liability if they meet all of the following three exemption requirements:

②In the case of property damage accidents

Since the Automobile Liability Act does not apply to property damage accidents, victims must file a claim for damages based on tort liability in Article 709 of the Civil Code. In this case, the victim must prove the driver’s intent or negligence.

(ii) When an AI agent is driving (assuming a socially accepted AI agent)
①In the case of a personal injury accident

Even if an accident resulting in injury or death occurs due to the autonomous driving of an AI agent, the Automobile Liability Act is generally considered to apply.³ If there is a malfunction in the system of a fully autonomous driving AI agent, the victim may be entitled to claim damages from the operator under the Automobile Liability Act, as it would not meet requirement (c) of the above exemption requirements.

We believe that operators who have paid compensation and insurance companies who have paid insurance claims due to system failures caused by AI agents will seek compensation from automobile manufacturers, AI system software providers, and others.

②In the case of property damage accidents

In the case of property damage accidents, Article 3 of the Automobile Liability Act does not apply, so claims for damages based on tort liability will be made against the driver, etc. However, with fully autonomous driving, there will be no driver error, etc., so it will be difficult to hold the driver responsible for intent or negligence, and it may be difficult to recognize the driver’s liability for damages.

In this case, if there is a problem with the AI ​​agent system, the victim may seek liability from the automobile manufacturer or software developer that provides it, as follows:

③Claims against the automobile manufacturer

Victims may file a claim for damages against the automobile manufacturer under Article 3 of the Product Liability Act (PL Act).
The PL Act imposes strict liability on manufacturers when a defect in a product causes damage to life, body, or property. However, there are also the following issues:

④Claims against software providers

Victims may seek compensation for damages against software companies that provide AI agents, citing defects in the AI ​​agents. In this case, because software is an intangible object and therefore product liability does not apply, victims may pursue tort liability under Article 709 of the Civil Code.
In this case, the victim will need to prove the software developer’s intent or negligence, so the hurdle for claiming compensation is likely to be higher than in cases where damages are claimed under Article 3 of the Automobile Liability Act or Article 3 of the Product Liability Act.

VI. Web3 AI Agents and Financial Regulation

In this section, we will consider how financial regulations apply to AI agents in Web3, following the ideas in Section III above. Although we will be examining this in the context of Web3, similar ideas also apply to financial AI agents, such as stock investment AI agents.

(i) Trading of crypto assets and stablecoins, and AI agents

It is conceivable that AI agents will trade crypto assets and stablecoins on behalf of users on decentralized exchanges (DEXs). Utilizing such a system is expected to bring the following benefits:

On the other hand, when conducting such transactions, it is necessary to consider whether there are any regulations regarding crypto asset exchange businesses, etc.

①When humans trade

When buying and selling cryptocurrencies and stablecoins (which are linked to the value of legal tender and redeemable at face value), it is necessary to consider the application of regulations regarding crypto asset exchange businesses (Article 2, Paragraph 15 of the Payment Services Act) and electronic payment instruments trading businesses (Article 2, Paragraph 10, Item 2 of the same Act).
Under the law, trading crypto assets as a mere investor does not constitute a “business” and is not subject to regulation. ⁵ On the other hand,
sales to the general public or acting as an agent for sales to the public are subject to regulation.

②When an AI agent trades

Even if an AI agent buys and sells cryptocurrencies or stablecoins on behalf of a user, there are no particular regulations for the user if the AI ​​agent is used for the user’s own investment purposes.
Also, even if there is a company that provides an AI agent to place buy and sell orders, there are likely to be no regulations if the agent simply assists users with the administrative procedures for buying and selling.
On the other hand, AI agents could act as intermediaries, for example, to easily connect users to DEXs.⁶ and is deemed to be managed and operated by a party other than the user, the provider of the AI ​​agent may be subject to regulations on crypto asset exchange businesses and electronic payment instrument trading businesses (intermediary regulations).

(ii) Investment Services and AI Agents

In the Web3 field, AI agents can develop investment strategies and provide investment advice and asset management services related to spot trading of crypto assets and stable coins, as well as derivative trading of crypto assets and stable coins.
In this section, we will explain the main legal issues that must be considered when AI agents provide such investment services, comparing them with when provided by humans.

①When performed by humans

When providing investment advisory and management services, different legal regulations apply.

(i) Investment advisory services

Investment advisory services refer to the business of providing advice on investment decisions regarding securities and derivative transactions by entering into a contract (investment advisory contract) for providing investment advice and receiving compensation.
The key points of regulation are as follows:

(ii) Investment management services

Investment management services are primarily considered to be (a) businesses that invest capital contributions from fund holders primarily in securities and derivative transactions (fund management businesses), and (b) businesses that invest and manage securities and derivative transactions after being entrusted with the authority to make investment decisions and manage assets by customers (discretionary investment businesses).
Key points of the regulations are as follows:

②When performed by an AI agent

When an AI agent provides investment advisory or management services, the question arises as to whether that business is subject to financial regulations. Generally, it is thought that the application of regulations to those who provide AI agents will be considered.
The key points of regulation are generally the same as when a human does the work, but the following points are particularly important in the case of AI agents.

VII. Other Laws

(i) Personal Information Protection Act, Consumer Contract Act

AI agents could potentially act as virtual assistants, assisting with sales and answering inquiries. For example, when selling products or services within the metaverse, avatars equipped with AI agents could be expected to automatically provide customer service.
In this section, we will discuss the main legal issues surrounding AI agents providing customer service, comparing them with traditional human services.

①When a human handles a customer

When humans handle customer interactions, they must comply with laws and regulations, for example, from the following perspectives:

(a) Handling of personal information

When acquiring and using personal information when dealing with customers, you must comply with the following rules of the Personal Information Protection Act.

(b) Consumer protection regulations

When explaining services or providing information to consumers, you must comply with the following regulations based on Article 4 of the Consumer Contract Act.

In the event of any of these breaches, the consumer has the right to cancel the contract, so it is important to provide accurate and sufficient information.

②When AI agents handle customer inquiries

(a) Handling of personal information

Even when AI agents deal with customers, they must handle personal information with care.

The Personal Information Protection Commission has issued a warning to OpenAI service providers, including that they must “notify or publicly announce, in Japanese, the purpose of use of personal information of users and other individuals,” and that they must not acquire sensitive personal information without the consent of the individual.¹⁰ In addition, the government has issued a warning to businesses that use generative AI to handle personal information, stating that “when a business handling personal information inputs prompts containing personal information into a generative AI service, it must fully confirm that the input is within the scope necessary to achieve the specified purpose of use of the personal information.”¹¹
When handling personal information using AI agents, it is necessary to keep these precautions in mind.

(b)Hallucination by AI agents

From the perspective of complying with Article 4 of the Consumer Contract Act, etc., there is a risk of “hallucination,” where an AI agent provides insufficient information or gives incorrect answers based on insufficient training data or outdated information.
The following measures can be considered to prevent this problem.

Reservations:

• The contents of this article have not been confirmed by the relevant authorities and merely describe arguments that are reasonably considered legally. Furthermore, the contents of this article are merely the authors’ current views and are subject to change.
• This article does not recommend the use of AI agents or Web3 AI agents.
• This article merely describes general ideas regarding AI agents and does not provide legal advice regarding specific cases.
• If you require specific legal advice, please consult a lawyer.

I. Introduction

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

II. Cryptoasset, NFT, and Stablecoin Regulation　

　1. Definition of Cryptoassets

The PSA defines cryptoassets as property value with the following elements:

　2. Cryptoasset Exchange Services

(1) Definition

Under the PSA, the Cryptoasset Exchange Service means any of the following acts carried out in the course of trade:

(2) Meaning of “in the course of trade”

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.

(3) Solicitation to Japanese Residents

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.

(4) Management of Cryptoassets

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.

(5) Intermediary, Brokerage, or Agency Service

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.

(6) Requirements for the License and Cost

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.

(7) Exchange M&A

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.

　3. Crypto Exchange’s Obligations

(1) Management of Users’ Property

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.

(2) Anti Money laundering

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.

　4. DEX

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.

　5. NFT

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.

　6. Stablecoins

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).

III. Crypto Financing

　1. ICO, IE

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.

　2. SAFT, SAFE

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.

IV. Crypto Staking

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.

V. Crypto Lending

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.¹²

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).

VI. Crypto Mining

Mining cryptoassets requires large amounts of electricity. Thus, mining appears to be regulated in some countries, such as Kazakhstan¹³Regulation of mining in certain areas in Russia is also being discussed¹⁴. 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.

VII. Crypto Taxation

　1. Tax on Individuals

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.

　2. Tax on Corporations

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

1 What is DAO?

A DAO is a decentralized autonomous organization that drives a business or project forward using smart contracts without a specific owner or manager. Overseas clients sometimes ask our firm whether they can sell DAO tokens in Japan.

2 Summary of regulation on sales of DAO tokens to Japanese residents

Below is a chart you need to consider before selling DAO tokens to Japanese residents.

<Chart to be considered>

3 Community DAOs and financial regulation

Community DAOs often issue governance tokens.

To consider the financial regulation of sales of DAO tokens in Japan, we must look at (a) whether the DAO provides some kind of dividend or more than 100% redemption of the principal (“Dividend, Etc.”), (b) whether the DAO has any legal entity nature that is similar to a joint stock company or LLC and whether the tokens represent nature similar to shareholders rights, and (c) whether DAO tokens can be used as a payment method.

3.1 DAO tokens that distribute Dividend, Etc.

Tokens in most community DAO do not have any dividend feature or profit distribution feature for token holders.  If there are such features, the regulation on investment DAO tokens will be applied.  Please see item 4 below.

3.2 DAO tokens issued by a company

If a DAO is structured in the form of a company, which happens rarely, and the DAO token awards member rights of the company to token holders, the right might be deemed as securities.  Type 1 Financial Instruments Business Registration is required for the sale of those tokens.

3.3 DAO tokens issued by non-company

In general, many DAOs are formed without clarification of the legal form.  Some DAOs just use a smart contract and do not have any form of legal entity.  Under Japanese law, such DAOs may be classified as partnerships or “associations without a juridical person.”  The rights of partnerships and associations without juridical persons do not fall under securities unless there are Dividend, Etc.

The sale of DAO tokens without Dividend, Etc. and so on issued by an organization other than a company should be classified as a crypto asset or NFT.

If the tokens fall under the definition of crypto asset, their sale shall be made by a licensed crypto asset exchange business operator.

However, if the DAO token is considered an NFT, there are no restrictions on its sale.

The distinction between a crypto asset (FT) and an NFT

In 2023, the Financial Services Agency (FSA) issued guidelines stating the distinction between a crypto asset (FT) and an NFT: (https://www.fsa.go.jp/news/r4/sonota/20221216-2/20221216-2.html).

The guideline states that if the asset does not have “means of payment” characteristics, it is not a crypto asset and that having “means of payment” characteristics can be determined by the following criteria: In general, if (a) DAO tokens cannot be used as a payment method, and (b-1) the price of the token is more than JPY 1,000 or (b-2) the issued number of tokens is less than 1M, the tokens are considered NFTs, and their sale is not regulated.

4 Investment DAOs and Financial Regulation

4.1 Investment DAO tokens are generally considered securities and regulated by FIEA

Under the FIEA, DAO tokens that pay Dividend, Etc. generally fall under the category of “electronically recorded transfer rights.”  Thus, in order to sell electronically recorded transfer rights, you must either register as a Type 1 Financial Instruments Exchange Business Operator (Type 1 FIEBO) and conduct the sales yourself or have a Type 1 FIEBO do it for you.  Furthermore, when soliciting 50 or more persons and issuing 100 million yen or more, the solicitation of the tokens becomes a public offering (Article 2, Paragraph 3 of the FIEA), which requires the submission of complex offering documents and continuous disclosure.

4.2 Exemption from FIEA might apply to some tokens, but it is not easy to use

As an exception, if sales are made only to qualified institutional investors (QIIs, professional investors) or wealthy individuals (with financial assets of JPY 100 million or more) who are 49 or younger, and if technical restrictions are in place to prevent other individuals from becoming DAO token holders through resale, then the sale falls under the exception category called “special business for qualified institutions, etc.,” and self-offering only requires a simple notification under Article 63 of FIEA.

We have heard that many investment DAOs in the US are issued to QIIs, and many investment DAOs limit their sales to avoid US security regulations.  The problem in Japan is that the definition of “professional investors” is much narrower than in the US.  In Japan, one criterion for becoming QII is that corporations and individuals must have at least JPY 1 billion in securities.  In the US, a person who has more than USD200,000 annual income can become a QII, and in the EU, a person who has more than EUR500,000 in financial assets (in addition to satisfying other requirements) can be a QII.  These requirements are much easier to satisfy than the requirements in Japan.

Japan also has a narrower exception to submit offering documents.  In Japan, offering documents are required for offerings exceeding JPY 100 million.  In contrast, exemptions apply for offerings less than USD6 million in the US (sales by Reg A Tier 1) and less than EUR5 million in some countries in the EU.

In light of the above, the issuance of investment DAOs is not popular in Japan but is still possible if you obey Japanese regulations.

EOD

I. What is a Blockchain Game?

A blockchain game is a game that uses the blockchain and uses crypto assets, tokens or NFTs (Non-Fungible Tokens).

In a typical game the following occurs:
(1) user purchases game assets that belongs to the game operator rather than the user,
(2) such game assets cannot be freely transferred, sold, or lent out, and
(3) even time-consuming data disappears after game distribution ends.

Whereas in blockchain games, it is said that the following occurs:
(1) the user is the holder of the token (game asset),
(2) the token can be transferred, sold, or lent out to third parties,
(3) third parties can also use the token, and
(4) as long as the blockchain exists,¹⁵the recorded digital assets will exist in perpetuity.

Ⅱ. Laws to Consider and Conclusions

When providing a blockchain game to Japanese residents, the laws listed below should be taken into account. Here is a summary of the laws that pertains to this matter:

III. Legal Considerations

The following is a discussion of each legal issue.

1. Crypto Asset Law and Security Act

(a) Where is the problem?
Under blockchain games, the game operator frequently sells game characters, items, weapons, and land etc. as NFTs to users in exchange for ETH or other crypto assets.

Japanese law does not regulate sales of pure NFT, but regulate sales of crypto assets and sales of securities. Thus, whether sold tokens are not deemed as crypto assets or securities are crucial issue.

(b) What are crypto assets?
Under the Fund Settlement Act, the seller, Crypto Asset is defined as follows:

Selling or providing custody of crypto assets are highly regulated and must generally be handled by registered crypto asset exchange operator and also it is not feasible for a blockchain game operator to obtain registration.

At this moment, whether tokens are considered as crypto assets is determined by the number of issued tokens and whether the tokens can be used as some form of payment. NFTs are generally not considered as crypto assets, but if a game operator says it is an NFT, and the NFT has payment features etc., it may be considered a crypto asset.

(c) What are Securities?
Japanese Financial Instrument and Exchange Act (FIEA or Security Act) governs the issuance or sales of securities. Securities includes stocks, bonds, mutual funds, collective investment scheme etc. We have been often asked by blockchain game operators whether it is legal in Japan to sell NFTs, such as land, which generate “income” or “dividend”. If NFTs generate income without the participation of players, they may be classified as securities. Thus, when selling profit-generating tokens, the game should consider including features of players’ effort, such as editing land to attract customers.

2. Gambling offenses

(a) General Remarks
The crime of gambling under the Penal Code is established by (1) contesting the gain or loss of property profits by (2) winning or losing by chance. In addition, not only money but also “property interest” is considered to be the object of gambling, and rice, land, and debt collection are all considered to be “property interest” subject to the crime of gambling. Crypto assets are also considered to fall under the category of property interest.

(b) Gacha (Loot Box), Reveal and Gambling Law
Some blockchain games have features of Gacha (loot box) and reveal. Users pay money or crypto assets to a gaming company and get NFTs randomly. For example, users pay 1ETH to get a game character NFT. Game characters may include Julius Caesar, Guanyu, Genghis Khan, Napoleon, George Washington etc, and those characters have different strength, powers, rarity etc, and what users can get is not revealed to users.
It was believed that these sales might be considered as gambling because (i) users pay property value, (ii) users receive property value which differs by chance, and (iii) there is winning or losing (of property value) by chance. However, in 2022, blockchain industries talked with a famous criminal law professor and some regulatory authorities and issued the guideline which states certain Gacha and reveal is not considered as gambling. Although the guidelines have no effect to police or criminal courts, the industry is now considering how following the guidelines may reduce the likelihood of criminal penalties.

The requirement is that the issuer and operator of games do not sell the same NFTs at different prices (for example, if the issuer sells NFTs that include Napoleon with 1ETH via Gacha, the issuer is not allowed to sell Napoleon NFT at a different price in another method), and do not buy back NFTs in a secondary market (for example, the issuer cannot buy back Napoleon NFT in 0.5ETH or 1.5ETH). In such cases, there is either winning or losing), and the issuer and operator shall not overstate the value of some NFTs in Gacha over other NFTs in Gacha.

(c) Synthesis
The same theory that applies to Gacha may apply to synthesis, but because synthesis is not discussed in the guidelines, we take a more cautious approach to synthesis.

3.Premiums and Premiums Law

(a)Initial Start
Developers often ask us of blockchain games if it is possible to give NFTs, game currency, crypto assets, other property to users free as a login bonuses, playing bonus and ranking bonuses etc. When conducting such distribution, it is necessary to consider the relationship with the Premiums and Representation Law.

(b) About the Premiums and Representation Law
The Premiums and Representation Law prohibits the offering of excessive premiums.
Premiums are (1) offered as a means of inducing customers, (2) offered incidental to a transaction, and (3) economic benefits such as goods or money. As the definition of economic benefits is broad, crypto assets, NFTs, in-game currencies, and other benefits might be considered as economic benefits.

Excessiveness will vary depending on whether the sweepstakes is general sweepstakes, joint sweepstakes, or all-inclusive sweepstakes, Still, it will be based on the following criteria to the extent that it is considered relevant to the game.

(c) Ranking Rewards and the Premiums and Representation Law
In traditional smart phone games, the top-ranking players frequently receive in-game currency. The economic value of in-game currency has been treated as zero or very low by game operating companies, and there is no issue under the Premiums and Representation Law.

In blockchain games, crypto assets and NFTs, which can be sold outside of the game might be given as prizes. In this case, the general sweepstakes restrictions apply. The transaction value determines the amount of the prize. Although it is difficult to determine how much the transaction value is, a reasonable approach would be to set the minimum charge as the transaction value and allow rewards of up to 20 times the minimum amount or 100,000 yen, whichever is lower.

(d) Play to Earn and the Premiums and Representation Law
If we consider a Play to Earn game as a game where players (a) purchase NFTs or game currency and (b) earn some reward (e.g., NFTs or game currency) by playing, the reward portion may be subject to the Premiums Regulation.

However, whether earned NFTs or game currencies will be considered “premium” is unknown. There is an argument that the Premiums Law does not apply to Play to Earn games because the rewards are not “extras (premiums),” but rather the purpose of purchasing NFTs and playing the game itself. Lottery winnings and game-play prizes, for example, are not considered “premiums,” but rather “the purpose” of the transaction itself (gambling law shall be discussed lottery winnings and game-play prizes). This issue has not been resolved in Japan, and careful deliberation is required.

Reserved Matters
The contents of this document have not been verified by the relevant authorities and are merely a description of arguments considered reasonable under the law. It is only the current thinking of our firm, and our firm’s thinking is subject to change.
This document does not recommend using blockchain games or purchasing NFTs.
This document is intended for blogging purposes only. Please consult your lawyer if you need legal advice on a specific case.

Introduction

Clients often ask us whether it is possible to structure a Decentralized Autonomous Organization (DAO) in Japan. Currently, Japan does not have regulations targeting DAOs, unlike Wyoming State or the Marshall Islands. So, we have written this article summarizing what is typically considered when forming a DAO in Japan.

1.DAO

1.1 What is DAO?

A decentralized autonomous organization (DAO) is a new legal structure with no central authority and members committed to acting in the organization’s best interests. DAOs are used to make decisions in a bottoms-up management style and have gained popularity among cryptocurrency enthusiasts and blockchain technology.

1.2 Classification of DAOs

There are several classifications of DAO described below:

1.3. Example of an Existing Overseas Law

A few places where DAOs are regulated are Wyoming State and the Marshall Islands. Below is a short description of forming a DAO in the Marshall Islands.

2. Financial Regulations on DAOs

2.1. Points to Consider

When structuring a DAO, one must consider the financial regulations and the legal form characteristics.

Here are several points to keep in mind:

1. Security regulation under the Financial Instrument and Exchange Act (“FIEA”) may apply when tokens have the possibility of dividends or redemption of the principal of more than 100% (dividends and redemption of the principal of more than 100% are from now on collectively referred to as “dividends, etc.”). As a general rule, token sales of such DAO must be conducted by a Type 1 Financial Instrument and Exchange Business Operator (“Type I license”) or by obtaining a Type 2 Financial Instrument Exchange Business Operator license (“Type II license”).

2. When selling Fungible Tokens without dividends, etc., it is necessary to have a Crypto Asset Exchange Operator conduct the sale or to obtain a Crypto Asset Exchange Operator license.

In contrast, these financial regulations generally do not apply when selling NFTs without dividends, etc.

3. You also need to consider the tax benefits. If you want to pursue tax advantages in an Investment DAO with dividends, etc., you can use a partnership or GK-TK scheme. If tax advantages are not particularly important, an association without rights, a general incorporated association, or a limited liability company can be considered a scheme to issue tokens. For the issuance of Fungible tokens or NFTs without dividends, etc., it may be better to have no particular legal structure.

2.2. Reference Table of Conclusions

The table below summarizes the legal scheme and financial regulations that should be considered in establishing a DAO.

The following regulations apply to token sales of Investment DAOs with dividends, etc. (assuming dividends or principal redemption of more than 100%).

On the other hand, a DAO without dividends, etc., is also possible. Its regulations are as follows:

With respect to possible legal forms for DAOs, the following comparisons can be made:

*1 Legal entities include limited liability companies, stock companies, and general incorporated associations. LLCs are generally easier to establish and operate than joint-stock companies. If you want to have a more public image, use a general incorporated association.
*2 Membership rights of a limited liability company, stocks of a stock company, membership rights of a general incorporated association.

2.3 Tokenization of Rights

Tokenization of rights of funds or partnership, where there is an investment of funds (including money and crypto assets), investment management, dividends, or redemption of the principal of more than 100%, would be broadly considered a collective investment scheme (fund) under Japanese law. Below is the summary of the Definition of a Collective Investment Scheme.

The revised Financial Instruments and Exchange Act, which came into effect on May 1, 2020, created the legal concept of Electronic Record Transfer Rights. The rights of tokenized collective investment schemes usually fall under the Electronic Record Transfer Rights below.

The sale of this electronic record transfer right requires a Type 1 Financial Business registration. If soliciting more than 50 people, it will be a public offering (Article 2, Paragraph 3 of the Financial Instruments and Exchange Act), and a securities registration statement must be submitted based on Article 5 of the FIEA.

If the sale is limited to qualified institutional investors or wealthy people of 49 or less, and even if there is resale, there are technical restrictions so that other people cannot become DAO token holders.

When the Investment DAO is formed, it can be sold in such a limited form at first, and after it grows, it can be sold to the general public while complying with increased regulations.

2.4 Tokenization of Company Membership Rights and Financial Registration Regulations

Regarding tokenization of company membership rights, a Type I FIBO license is necessary when a third party sells the rights, and Type II is essential in the case of self-solicitation. In the case of tokenization of company membership rights (shareholders rights) of a joint stock company, a Type I license is necessary in the case of solicitation by a third party, and no license is required in the case of self-solicitation.

2.5 Regulations on Public Offerings, etc.

 If any of the following applies, it becomes a public offering. In principle, it is necessary to submit a securities registration statement.

2.6 Financial Regulations for DAOs without Dividends

If DAOs have no dividends, etc., they are not considered securities, but different financial regulations may apply.

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 investment in DAO. This article provides merely a summary for discussion purposes. If you need legal advice on a specific topic, please feel free to contact us.