Trouble over cryptocurrency claimed to be newly listed on market

A consumer was told that a cryptocurrency to be listed would rise in price and could be exchanged with another cryptocurrency. Actually, things were different from the original explanation. The following shows details of the case.

Details of the inquiry

A friend of mine said to me, "A new cryptocurrency (A Coin) will be listed on the market¹ next month. The price will increase in the future. If you buy some now, you can make a profit." The friend added, "If you install an app of an overseas cryptocurrency exchanger, get your account and wallet², you can put A Coin in the wallet. If A Coin should not be listed, your contractor would buy your A Coin, so there's no risk for you" Then, I paid 5,000,000 yen in total to buy A Coin.

Later, I installed the app of the overseas cryptocurrency exchanger and set up my account. When I opened the app, it was shown on the screen that A Coin was in my wallet. Although I was told that A Coin could be exchanged with cryptocurrency B, it was not possible to do so.

I don't know if A Coin is listed on the market. Things are different from original explanation. Although I demanded a full refund from the contractor, the company was temporizing, saying, "We are looking for a buyer."

(man in his 40s, salary earner)

1. ¹ To be able to sell and buy the cryptocurrency at exchanges
2. ² A place to keep cryptocurrencies

Summarized outcome

After receiving the inquiry, the local consumer affairs center (hereinafter called "the center") contacted the company concerned, and the money was partly refunded to the consumer. After that, it was hard for the center to advance a negotiation. There were many unclear points about A Coin. Then, NCAC and the center decided to jointly question the campany about the unclear points to resolve the problem.

Based on the findings about the contract and A Coin from the interview, NCAC confirmed details with the company, giving questions like: "Is A Coin a cryptocurrency?", "Is it possible to exchange A Coin with cryptocurrency B? ", "When will A Coin be listed on the market?"

The company insisted that A Coin was a token as a security for their loan from consumers and did not fall under the category of cryptocurrency defined by the Payment Services Act. The company did not clearly mention when A Coin would be listed. NCAC pointed out that A Coin could be regarded as a cryptocurrency under the Payment Services Act. The company admitted the possibility and accepted to refund the remaining amount in the name of payment for a debt. Accordingly, the consumer returned A Coin to the company. Then, NCAC concluded the consultation.

Problems

About A Coin

Although the company insisted that A Coin was a token and not a cryptocurrency, A Coin may fall under the category of cryptocurrency.

Specifically, the company claimed "it is possible to exchange A Coin with cryptocurrency B." If it is true, A Coin could fall under the category of cryptocurrency-2³ which can be exchanged with cryptocurrency-1⁴ (cryptocurrency B) under the Payment Services Act. Even if the company insists that A Coin is just a token, A Coin could fall under the category of cryptocurrency under the Payment Services Act.

If the token falls under the category of cryptocurrency under the Payment Services Act, the company needs to be registered as a virtual currency exchange service provider to sell and buy tokens corresponding to cryptocurrency and exchange cryptocurrency with other kind of cryptocurrency as business⁵. However, NCAC did not find the company name on the list of registered virtual currency exchange service providers.

1. ³ Cryptocurrency defined under Article 2-5-2 of the Payment Services Act, which can be exchanged with cryptocurrency defined in Article 2-5-1 of the Act.
2. ⁴ Cryptocurrency defined under Article 2-5-1 of the Payment Services Act, which can be used for paying a price.
3. ⁵ Article 63-2 of the Payment Services Act

About overseas cryptocurrency exchangers

According to "Guidelines for Administrative Process⁶" issued by the Financial Services Agency, it is necessary for a company to be registered as a virtual currency exchange service provider to provide cryptocurrency exchange service in Japan even if the company is based in a foreign country. Moreover, even if a foreign cryptocurrency exchanger is registered in a foreign country under a foreign law similar to that of Japan (a foreign cryptocurrency exchanger defined under the Payment Services Act⁷), any foreign cryptocurrency exchanger shall not solicit consumers to buy or sell cryptocurrency in Japan without being registered with Japanese authorities as a general rule⁸. In principle, solicitation prohibited in this manner includes online advertisements.

1. ⁶ Refer to "Guidelines for Administrative Processes: Financial Companies No.16[PDF]" (written in Japanese)
   and "Overview of Virtual Currency Exchanger[PDF]" (written in English) issued by the Financial Services Agency
2. ⁷ Article 2-9 of the Payment Services Act
3. ⁸ Article 63-22 of the Payment Services Act

Fund raising with tokens

In order to raise funds for a project, some companies and organizations deliver electronic tokens in exchange for cryptocurrencies or legal currencies. This method is called ICO (Initial Coin Offering)⁹ in general. It is said that there are various types of tokens issued through the system of ICO and that tokens are often sold or exchanged with cryptocurrencies. Seeing the outcome of the above case, it is possible to construe that the funds were raised through ICO.

1. ⁹ "Caution about ICO for users and business operators[PDF]" (written in Japanese) issued by the Financial Services Agency on October 27, 2017

Conclusion

A Coin could fall under the category of cryptocurrency in the legal sense. The company was not registered as a virtual currency exchange service provider in Japan. In addition, it may be said that the company raised investment, so the above solicitation approach may also fall under the category of collective investment scheme under the Financial Instruments and Exchange Act. Therefore, in cases related to cryptocurrency and ICO, it may be necessary to consider the Financial Instruments and Exchange Act and other financial laws in addition to the Payment Services Act and related guidelines.