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Bitcoin ETFs in Japan: 54% of Institutional Investors Want Crypto Access But Regulatory Hurdles Remain

Last Updated June 25, 2024 2:23 PM
James Morales
Last Updated June 25, 2024 2:23 PM

Key Takeaways

  • A recent survey found that 54% of Japanese investment managers plan to invest in crypto in the next three years.
  • However, most would prefer to gain exposure via structured investment vehicles like ETFs.
  • Crypto ETFs aren’t currently allowed in Japan and must overcome several hurdles before they can be approved.

In a year in which the US, the UK and Hong Kong have all eased restrictions on cryptocurrency investment products, institutional investors the world over are reconsidering their traditional aversion to the asset class.

A recent survey  by Nomura found that 54% of Japanese investment managers plan to invest in crypto in the next three years and that they have a strong preference for structured investment vehicles. However, there are a number of regulatory hurdles that must be cleared before Japan can welcome Bitcoin Exchange-Traded Funds (ETFs) and similar crypto funds.

Japanese Investors Want Crypto ETFs

The Nomura report observed that 62% of Japanese investors viewed crypto as an opportunity to diversify their portfolios. Among those with a high degree of Web3 knowledge, this figure rose to 88%.

Among the survey respondents, 53% said they want to access cryptocurrencies via ETFs versus just 31% who want to invest in them directly.

When asked why they were not currently investing in crypto assets, the most commonly cited reason was the lack of fundamental analysis methods. 

Meanwhile, “21.2% blamed “regulatory bottlenecks.” Concerns over regulatory guidelines were especially prevalent among respondents who belonged to banks and life insurance companies, which are subject to enhanced oversight under Japanese law.

Capital Markets Regulation Preventing Crypto Investment

As in most countries, systemically important financial institutions, including banks, insurance companies and pension funds, must follow strict rules governing what they can invest in.

Capital market regulations tend to favor low-risk investments with predictable returns. This has traditionally ruled out more risky, volatile assets like Bitcoin. 

What’s more, if Japan is to embrace crypto ETFs, the country’s Investment Trusts Act must first be amended to include cryptocurrencies in its list of “specified assets.” The Japanese Financial Services Agency (FSA) could also create obstacles given its traditionally cautious stance toward cryptocurrencies.

Finally, questions surrounding the taxation of potential Bitcoin ETFs must also be resolved. 

Japan’s Crypto Tax Dilemma

Under Japan’s current tax framework, profits from crypto trading incur a levy of up to 55%. In contrast, ETF profits fall under the 20% financial income tax rate. 

If the tax rate for crypto ETFs is set at 20% as it is for other ETFs, Japanese traders and investors could migrate away from the spot market en masse. If this happened, crypto exchanges would be undercut by traditional securities exchanges and the entire Japanese crypto sector may face an existential threat.

Given this risk, industry representatives in the country have called for tax reform , arguing in favor of a flat-rate capital gains tax, as is the norm in the US and elsewhere.

Lawmakers Warm to Crypto Funds

Despite the challenges facing Bitcoin ETFs in the country, the Japanese government can hardly be considered anti-crypto and while the country’s regulatory stance is generally cautious it isn’t hostile. 

In a sign that lawmakers could lift the current prohibition on ETFs holding crypto, the government published a Web3 White Paper in April which floated the prospect of easing restrictions.

“It is necessary to consider the appropriateness and pros and cons of making crypto assets an investment target for investment trusts (including ETFs) in light of the objectives of the Investment Trusts Act,” the document  stated.

A change to the Investment Trusts Act could pave the way for Japanese ETFs to hold Bitcoin, Ether and potentially a variety of alt coins, depending on the definition of assets specified.

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