Financial Services Agency's Stance: "Self-Custody Wallet Services Do Not Constitute Crypto Asset Exchange Business"

The Financial Services Agency (FSA) has clarified that services using unhosted wallets, where users control their private keys, are not considered crypto asset exchange businesses.

This landmark decision, initiated through the Gray Zone Clearance System, provides clarity to wallet providers like JCBI's PassWallet, ensuring they are not subject to custody regulations.

As of October 2024, JCBI has also begun offering PassWallet free of charge, promoting secure and straightforward biometric wallet services for businesses.

Clear Legal Position of Self-Custody Wallets

On October 8, 2024, Japan's Financial Services Agency (FSA) announced that "services for unhosted wallets using authentication technology do not fall under the category of crypto asset exchange business."

Self-custody wallets, where users manage the private keys necessary to use the cryptocurrency they hold, such as MetaMask and Phantom, fall under this category.

In Japan, four specific activities are defined as "crypto asset exchange business," leaving ambiguity about what crypto-related services might fall under this regulation. These activities include:

• Buying, selling, or exchanging cryptocurrencies with other cryptocurrencies.
• Acting as an intermediary, broker, or agent for the activities listed in the previous item.
• Managing users' funds in relation to the activities listed in the previous two items.
• Managing cryptocurrencies on behalf of others (excluding cases where other laws provide specific regulations for conducting such management as a business).

This latest announcement is seen as a significant step in reducing the legal uncertainty surrounding crypto-related services and clarifies the legal status of self-custody wallets.

First Application of the "Gray Zone Clearance System"

This stance was issued in response to a question submitted by the Japan Content Blockchain Initiative (JCBI) through the Ministry of Economy, Trade, and Industry's "Gray Zone Clearance System."

JCBI, which provides authentication infrastructure for wallet service providers, developed "PassWallet," the world’s first corporate-oriented biometric authentication wallet using passkeys.

The FSA’s statement was issued specifically in response to inquiries about the "PassWallet" service. JCBI clarified that "since using PassWallet does not involve managing crypto assets on behalf of others, businesses utilizing PassWallet are not subject to custody regulations."

The Japan Cryptocurrency Business Association (JCBI) has confirmed with the Financial Services Agency (FSA), through the application of the Gray Zone Elimination System to the Ministry of Economy, Trade, and Industry, that providing blockchain services using PassWallet does not fall under "managing crypto assets on behalf of others" as stipulated in Article 2, Paragraph 15, Item 4 of the Payment Services Act. As a result, businesses utilizing PassWallet® are not subject to custodial regulations.

Therefore, businesses can confidently use PassWallet® as a compliant service.

Following the confirmation from the FSA, JCBI began offering PassWallet for free as of October 9, 2024.

PassWallet enables companies to add a wallet function to their services using a passkey, allowing users to easily authenticate through facial or fingerprint recognition.