May 29, 2024
Policy & Regulation

Japan’s Financial Services Agency Proposes Legal Clarity for DAOs

In a groundbreaking move, Japan’s Financial Services Agency (FSA) is set to redefine the legal landscape for decentralized autonomous organizations (DAOs). The FSA has proposed a significant amendment to the Financial Instruments and Exchange Act, specifically targeting the legal nature, operational rules, member responsibilities, ownership, and tax relationships of DAOs.

The proposed amendment, known as the “Cabinet Office Ordinance (Draft) Amending Part of the Cabinet Office Ordinance Concerning the Definitions Provided in Article 2 of the Financial Instruments and Exchange Act,” aims to grant a specific token, the “Limited Company Type DAO Employee Rights Token,” the same treatment as regular limited liability company (LLC) member rights.

This move is geared towards simplifying regulations on employee rights in tokenized LLCs and streamlining the operations of DAOs, which have gained prominence as a means of community management through blockchain technology and communication tools.

The lack of a clear legal status for DAOs has been a significant hurdle, posing risks of unexpected legal implications and hindering their smooth formation and operation. The FSA’s proposed amendment seeks to address these challenges by providing a more defined legal status for DAOs in Japan.

The FSA is currently welcoming public comments on the proposed amendment until March 4th. Once the necessary procedures are completed, the amendment is expected to be promulgated and implemented.

By leveraging existing legal frameworks, Japan aims to expedite the clarification of DAOs’ legal position and encourage their use. The report suggests that establishing and operating a DAO as a limited liability company can confer legal personality, clarify member liabilities, enable flexible organizational management through self-governance, and specify tax treatment.

In a parallel effort, the Liberal Democratic Party’s Digital Society Promotion Headquarters and the web3 project team organized a “DAO Rulemaking Hackathon” at the end of the previous year. They collected issues and requests from various companies, organizations, and investors, submitting them as recommendations to the Minister of Finance.

Japan’s proactive approach in developing a legal framework for limited liability company-type DAOs aligns with the country’s broader efforts to boost its blockchain and crypto sectors. The National Tax Agency had previously revised its laws to exempt crypto token issuers from 30% corporate taxes on unrealized gains, effective from June 20, 2023.

While crypto investors will still be subject to a maximum 55% income tax on earnings over JPY 200,000 ($1,797) related to cryptocurrency, classified as “miscellaneous income,” these measures underscore Japan’s commitment to fostering innovation and embracing the potential of decentralized technologies.

Photo by Aleksandar Pasaric

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