The year 2022 marked a significant milestone for the Web3 ecosystem in Japan. The Japanese government established a “Web3 Policy Office”, and startup conferences—finally—began hosting side conferences for Web3 and crypto. The Nikkei even ran a full-page advertisement for a Mainnet project. Japanese society is becoming more receptive to Web3 and recognizing it as a trend. As a result, many global projects are seeking opportunities in Japan, and Japanese projects are gaining interest from global investors.
But really, why now? There are several reasons for this:
This article will explore three key characteristics of the Japanese Web3 industry, including the aforementioned reasons.
The crypto industry in Japan has struggled to keep up with trends, such as the rapid growth of De-fi in 2019. Japan, along with Korea, had strong centralized exchanges, but the Coincheck Hack of January 2018, which resulted in a loss of $500 million, caused the government and financial authorities of Japan to launch a comprehensive investigation of exchanges and suspend the issuance of new licenses. It delivered the final blow to the global crypto industry, which was already in shock as the South Korean Minister of Justice announced plans to shut down crypto exchanges. The long crypto winter has begun.
Japan has a history of being the root of crypto industry downturns. Mt. Gox, which accounted for 70-80% of global Bitcoin trading volume in 2014, was also a Japanese company headquartered in Shibuya. The company filed for bankruptcy protection after losing 850,000 bitcoin from a hack. These incidents have made it difficult for De-fi to thrive in Japan, a conservative country that has traditionally focused on hosting business models like exchanges rather than adopting cutting-edge technology such as smart contracts.
As regulations in the crypto industry became more stringent, Japanese entrepreneurs became more hesitant to take risks and grow their businesses. Some of them went overseas and kept building, but Japan as a whole was largely ignored in the global market. While other countries were surpassing Japan in the race, entrepreneurs in Japan often used regulatory difficulties as an excuse for the lack of growth in the Japanese market. However, the failure of industry leaders such as Terra and 3AC caused the Japanese community to reconsider their approach and realize they could be more successful in the long run. They started thinking: “Wait… so I can win a medal just by finishing the race?”
Moreover, the recent bankruptcy of FTX demonstrated the effectiveness of Japan’s strict regulatory focus on risk management. FTX was operating its Japan business through a subsidiary after acquiring a local exchange called Liquid and rebranding it to FTX Japan. As a result of Japan’s regulations, FTX Japan had its customer funds fully separated. It announced that it currently holds more than 100% of its customer funds. Since the funds will be excluded from Chapter 11 proceedings, it appears that FTX Japan’s account holders will be able to fully recover their funds, though it would take some time.
As the global crypto industry meets the third winter and experiences a series of bankruptcies, the Japanese market remains unscathed — because there wasn’t much there in the first place — and the community is more confident than ever.
With this momentum, a significant number of Japanese entrepreneurs are moving overseas for their businesses. As they come out of their comfort zone for the first time, they are drawn to Dubai, the third-generation hub of the Web3 industry. Switzerland, the first-generation hub until 2017, is declining in popularity, and Singapore, the second-generation hub, is facing increased regulatory strictness. Hence, Dubai becomes the most attractive option for them.
One of the main reasons why Japanese entrepreneurs are leaving the country is tax issues. Currently, Japan taxes corporations on their unrealized gains from cryptocurrencies, with an effective tax rate of around 30%. This can be a significant burden for companies that own large amounts of cryptocurrency at the end of their fiscal year. In addition, crypto gains of individuals are classified as “miscellaneous income” and are not eligible for separate taxation, leading to a maximum effective tax rate of 55%. The crypto industry in Japan has long criticized and asked for changes to these tax policies, but there has been no progress. However, as the Kishida administration began introducing Web3-friendly policies, it seems at least companies that have issued their own cryptocurrency will be exempted from taxation on unrealized gains starting next year.
Nonetheless, relocating to Dubai is a more attractive option for Japanese entrepreneurs than waiting for Japan’s tax policies to change, as income taxes for individuals and corporate taxes for companies in free-trade zones are exempt in Dubai. The author has already seen a two-digit number of Japanese entrepreneurs moving or planning to move to Dubai this year. Likely, it is the largest migration of Japanese entrepreneurs since the 2000s. The Japanese community in Dubai has reached its critical mass and will continue to grow.
As an alternative, there are movements attempting to address this issue by relocating within Japan. Aogashima, a volcanic island located approximately 220 miles (360 kilometers) from Tokyo, is a typical example. With less than 170 people, it has the smallest population of any island in Japan but a relatively youthful demographic. Noritaka Okabe, the founder of JPYC, is working to convince Aogashima’s inhabitants to turn the island into a “special blockchain zone,” offering incentives for Web3 companies. In the long term, he hopes to transform the local community into DAOgashima, a meme that has gained popularity and many fans.