Japan's regulatory delays drive crypto liquidity offshore despite 20% tax proposal

Japan’s regulatory delays in the cryptocurrency sector are creating friction for innovation, even as proposed tax reforms aim to streamline operations. A July 3, 2025 report by AInvest highlights that Japan’s slow, risk-averse regulatory process is pushing liquidity and startups offshore despite its advanced technological infrastructure [1]. This divergence between technical readiness and bureaucratic inertia raises questions about the nation’s ability to compete globally in the rapidly evolving crypto landscape.

The issue stems from a prolonged approval timeline for cryptocurrency-related businesses, which has discouraged entrepreneurs and investors from establishing operations domestically. Startups and liquidity providers are increasingly redirecting efforts to jurisdictions with more agile regulatory frameworks, undermining Japan’s potential to lead in blockchain innovation. The report notes that while Japan has invested in robust digital infrastructure, the lack of proportionate regulatory agility is creating a bottleneck [1].

Maksym Sakharov, CEO of WeFi, emphasizes that Japan’s slow and risk-averse approval system stifles innovation, leading domestic projects to seek faster, more flexible markets abroad. According to COINOTAG, Sakharov highlights that without reforming Japan’s regulatory culture, even a proposed 20% flat tax on crypto gains won’t reverse the outflow of startups and liquidity [2]. Japan’s dual-layer approval process, involving the Japan Virtual and Crypto Assets Exchange Association (JVCEA) and the Financial Services Agency (FSA), can extend go-to-market timelines to over a year. This protracted review period drains resources and discourages innovation, forcing many projects to prioritize overseas listings where regulatory pathways are more streamlined.

Analysts argue that the current environment may exacerbate the brain drain in the fintech sector. Japan’s cautious approach, often characterized by extended reviews and stringent compliance requirements, contrasts with the dynamic needs of crypto startups. For instance, companies seeking to integrate blockchain solutions for cross-border payments or decentralized finance (DeFi) projects face delays that deter capital investment. This hesitancy could diminish Japan’s appeal as a hub for next-generation financial technology, even as its tax reforms—aimed at clarifying revenue treatment for crypto transactions—seek to attract capital.

The proposed tax changes, while significant, may not offset the reputational damage caused by regulatory delays. A key concern is that the reforms could inadvertently widen the gap between regulatory clarity and operational feasibility. For example, if tax frameworks are finalized before the regulatory approvals for underlying crypto platforms are resolved, businesses may face conflicting obligations. This misalignment risks creating a fragmented ecosystem where compliance costs outweigh the benefits of innovation.

The broader implications extend beyond Japan’s domestic economy. As global competition for crypto talent intensifies, nations with streamlined regulatory systems—such as Singapore or the U.S. states of Wyoming and Texas—are likely to capture market share. Japan’s delays could weaken its position in the Asia-Pacific region, where other countries are accelerating their adoption of blockchain technology for trade and financial services. South Korea’s Virtual Asset Utilization Promotion Act (VAUPA), which focuses on ongoing compliance rather than pre-approval, enables quicker market access, while Singapore’s clearer compliance pathways and the UAE’s progressive frameworks for tokenized securities issuance further highlight Japan’s regulatory lag [2].

To mitigate this, Japan’s regulators must balance risk mitigation with the need for speed. Potential solutions include establishing dedicated task forces to expedite approvals or adopting a “sandbox” approach that allows controlled testing of new technologies. Such measures could align regulatory timelines with the pace of innovation while preserving consumer protection standards. Sakharov recommends implementing a functional sandbox to support real-world testing of staking and governance models and streamlining the JVCEA and FSA approval processes by introducing clear timelines and reducing repetitive review cycles [2].

In the absence of immediate reforms, the exodus of crypto startups and liquidity providers is expected to continue. This shift not only deprives Japan of potential economic benefits but also risks positioning it as a laggard in a sector poised for exponential growth. As the July 2025 report underscores, the nation’s ability to adapt its regulatory approach will be pivotal in determining whether it remains a leader in financial innovation or cedes ground to more agile competitors [1].

Source: [1] [Japan's slow crypto approvals drive liquidity offshore](https://www.ainvest.com/news/japan-slow-crypto-approvals-drive-liquidity-offshore-experts-warn-2507/) [2] [Japan’s Regulatory Delays May Hinder Bitcoin Innovation Despite Proposed Tax Changes](https://en.coinotag.com/japans-regulatory-delays-may-hinder-bitcoin-innovation-despite-proposed-tax-changes/)