Many in the global blockchain community dream about Japan. The country enjoys the world’s most favourable regulatory regime towards tokenization and security token offerings, they say. To find out what the practice is, Digital Asset Live Editor-in-Chief talked to Keiko Tanaka, CEO of J-STO, Japan’s largest tokenization platform.
Q1) Ms Tanaka, the popular view holds, that in terms of regulation for digital assets, Japan is one of most advanced countries in the world. Cryptocurrencies are almost legal, Japanese fiscal authorities hold the view, that there is no need for special legislation to regulate digital assets such as tokenized real life assets. How difficult it was to follow regulatory requirements when you launched J-STO?
A1) The laws and regulations regarding Japanese Security Tokens are not yet complete.
In Japan, Security Tokens must be handled as the traditional “Securities” themselves.
The laws and regulations differ for each asset class backed by the security tokens, and they must comply with the Financial Instruments and Exchange Act.
It took more than two years for LEVIAS in legal discussions to launch the J-STO Solution.
Currently, some announcements have been made one after another by leading companies to enter the STO market, and it is also clear, that expectations regarding STO are high in Japan.
However, LEVIAS is the only one who has developed a fully legal STO solution in Japan to date. This fact shows how difficult it is to implement a fully legal STO in Japan.
Q2) One major detail is unusual though in the Japanese regulations on digital assets. One needs to set up a private fund for each STO. How does it work, can you explain in detail?
A2) As mentioned in Q1, “Security Tokens” are handled as traditional “Securities” themselves.
Furthermore, STs are legally defined as digital tokens that represent the right and status of securities.
This means that just because you use Security Tokens, you can’t escape the laws and regulations that apply to securities.
STO must comply with the Financial Instruments and Exchange Act to sell securities (Security Tokens) and raise funds from many investors in Japan.
J-STO realizes STOs using a business-type fund (collective investment scheme) established under the framework of current Japanese laws and regulations.
The details of the J-STO scheme depend on each asset which are backed by Security Tokens.
Q3) In Europe, this activity has to be licensed, that is one has to have a license to banking and financial activities, is it the case in Japan? Who holds the financial license in the STOs done by J-STO.
A3) In Japan, Financial Instruments Business Operator Engaged in Type I or Type II Financial Instruments Business can handle Security Tokens.
Besides, financial licenses in Japan are subdivided compared to developed countries overseas, and multiple licenses are required depending on the attributes of the assets and their handlings.
In Japan’s first J-STO, which we implemented in March 2019, our partner company Nippon Angels Investment Co., Ltd., was in charge of the Handling of Private Placement of Securities.
NAIC: Financial Instruments Business Operator [Investment Management Business, Type II Financial Instruments Business, Investment Advisory Business] (Registration number: Director of Kanto Local Finance Bureau (Kinsho) No.922)
Q4) Often new issuance platforms try it first on themselves, ie they tokenize themselves first. Did you do it as well? Which lessons did you learn there?
A4) We started with our own STO project.
What we learned from it was that STOs in Japan have higher regulatory hurdles compared to overseas, so there are still many challenges to overcome.
At the same time, we believe that overcoming these strict regulations will improve international creditworthiness from the perspective of investor protection.
Although, in the market there are many ICO projects which were announced as STO projects.
It also may be said that the difference between STO and ICO is just how they loosely regulated and how the hurdles are lowered.
From these backgrounds, we strongly believe that our J-STO will be clarified as a fully legal solution.
Q5) Will you please describe your business plan for the first years of operations (comment: only if it is open to discuss, I am not enquiring into any secrets, if it is, please omit the question)
A5) 2019 is first year of J-STO, and we are planning multiple J-STO projects.
In 2020, LEVIAS plans to develop Japan’s first secondary distribution platform for Security Tokens (Security Token Trading System).
This makes it possible to trade Security Tokens which are offered by J-STO.
Furthermore, LEVIAS is going to increase the number of deals handled by primary/secondary markets and promote further growth of the Japanese Security Token market.
LEVIAS will also work globally by cooperating with overseas Security Token Exchanges.
In 2021, as a top member of the Japanese Security Token market, LEVIAS will build a model for the de jure standards and functions in order to become a “Global Hub” from the Japan Security Token market.
LEVIAS aims to play a part in digital asset innovation by linking the Japanese and overseas markets and building an economic infrastructure system for the Security Token market.
Q6) Now a bit uncomfortable question, if I may. If a global, North America based platform, enters the Japanese market of tokenization, what will your strategy be? How likely it is to happen?
A6) In order to expand the overseas STO/ST platforms in Japan, it is necessary to customize them according to the Japanese financial laws and regulations.
Another important point is whether financial instruments business operators can manage them responsibly.
At least, currently it is almost impossible to deploy STOs in Japan using overseas platforms because of legal matters.
In the future, overseas platforms are expected to enter to the Japanese STO/ST market one after another by solving legal challenges.
Our strategy is not to compete with other overseas platforms but to cooperate with them by utilizing our J-STO Solution.
Q7) Which sectors of the Japanese industry are, in your view, likely to take on tokenization first?
A7) In Japan, the real estate industry has a tendency to use tokenization and some listed companies are making press releases about their intention to use security tokens.
In addition, there is a trend to convert securities such as stocks and bonds into Security Tokens.
We expect that real estate companies or financial companies will implement tokenization.
Q8) A question on HR: what skills do you need now, and how do you hire new employees?
A8) LEVIAS requires a mindset that allows challenging new things with a strong belief.
In the field of technology, engineers with a skillset of Blockchain, AI, or network construction, are indispensable.
In the field of J-STO, knowledge about FinTech is a minimum requirement.
We are going to secure new talents and human resources by fostering young people via headhunting.
Q9) What would be your very conservative estimate on the volume of tokenization in Japan, in short term (1 year), mid term (2-3 years), long term (5 years)?
A9) We believe that tokenization will progress mainly in trust beneficiary rights of real estate, in bonds such as social lending, and in private infrastructure funds targeting renewable energy in Japan.
Currently, such market size is approx. 3.55 trillion JPY, but we believe that it will grow to 128.9 trillion JPY in 5-10 years, based on the CAGR (Compound Annual Growth Rate) calculation. Besides, it is considered impossible to tokenize all of them. In a very conservative estimate, for example, if 1% to 5% of them are tokenized after 5-10 years, we can expect that the volume of ST tokenization will be from 1.289 trillion JPY to 6.445 trillion JPY.
Q10) J-STO in 5 years from now, how does it look like?
A10) J-STO is a new way of raising funds in Japan. Five years later, it may be treated as a standard solution.
It is expected that contracts and transactions which require labor costs and have been generally performed until now, they will be fully automated by security tokens with low cost. This innovation may promote the liquidity of all assets and generate significant economic effects.
In this trend, our J-STO is going to make opportunities for excellent entrepreneurs to take on global challenges, get over difficulties, and build an innovation model that contributes to our society.