On Monday, a government official stated that Japan intends to alter its Foreign Exchange and Foreign Trade Act to put cryptocurrency exchanges under banking regulations. The proposed change will make it illegal for sanctioned countries to use digital assets to circumvent sanctions.

At a press conference, Chief Cabinet Secretary Hirokazu Matsuno indicated that the government aims to introduce legislation to amend foreign currency laws to cover cryptocurrency exchanges.

Fumio Kishida, the country’s newly elected prime minister, backed the proposed change and called for cooperation with Western allies to enforce the new restrictions. Under the new foreign cryptocurrency exchanges legislation, cryptocurrency exchanges, like banks, will be required to examine and flag transactions involving sanctioned Russian persons or businesses.

Following Russia’s actions in Ukraine, Japan and the majority of its Western allies placed a slew of financial sanctions on the country. The country’s financial regulatory agency advised cryptocurrency exchanges to avoid facilitating transactions for sanctioned clients earlier this month.

On the other hand, a parliamentary amendment to the law would require cryptocurrency exchanges to prevent transactions with sanctioned Russian officials, billionaires, banks, and other institutions.

Cryptocurrency is not a way for Russia to get around Western sanctions.

Russia’s growing interest in the cryptocurrency market and recent comments from its officials have fueled fears that the country may try to circumvent sanctions by utilizing bitcoin.

As a result of financial restrictions, Russia has been forced to explore other payment methods and ways to enter the global trade industry. While one of the most hotly debated topics has been the potential use of digital assets to circumvent trade penalties, experts have dismissed such fears as “totally unfounded.”

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Growth hindrances

In the medium to long term, Japan’s cryptocurrency ecosystem still confronts challenges. The closure of VALU, a blockchain-based social networking start-up, suggests the anticipation of stricter regulations on cryptocurrency exhchanges. If necessary reforms are not implemented, the proliferation of Japanese companies offering cryptocurrency-related services could be hampered in the long run.

Japan is still lagging behind its neighbors in terms of bitcoin acceptance. According to a poll, only 4% of Japanese citizens utilized or owned cryptocurrency, compared to 7%, 9%, and 21% in China, India, and Vietnam. While these figures indicate that there is an opportunity for development, the country’s diminishing population of young people may limit adoption, as most Japanese crypto users are under the age of 30. The continuance of cash payments in Japan, particularly among the elderly, may cause cryptocurrency to halt in the medium term. Cashless payments accounted for only 26.8% of revenues, according to Japan’s Ministry of Economy, Trade, and Industry (METI). 

The yen’s stability is also expected to limit cryptocurrency growth. Inflationary pressures have contributed to a rise in bitcoin adoption in countries like Turkey. On the other hand, the yen’s steadiness makes it difficult for businesses or individuals to hedge currency risk with highly volatile cryptocurrencies. Stablecoins, which are tethered to a fiat currency or a commodity, are becoming more popular, making them more appealing. JPYCoin, a yen-pegged stablecoin that can be used to shop on Amazon, indicates that this sort of digital money could increase in Japan.