NFTs present a new opportunity for asset creation, revenue, and marketing in an entirely digital space, and the Japanese market presents several indications of growth. The NFT market was worth about JPY20 billion (approximately US$165 million) in 2019, and grew to about JPY30 billion (approximately US$248 million) in 2020. This rapid growth indicates that a cross-section of business and industries are willing to utilize NFT in their business model.

Two major industries in Japan have had a clear uptake in using NFTs in their course of business: the net/app gaming industry and the art industry. Because NFTs can be generated cheaply and transferred easily, it is a particularly popular choice for creatives to sell and market their goods in Japan and around the world.

Gaming is an obvious market for digital goods since their entire production functionally exists in a digital medium. Net games and app games continue to grow in popularity globally and particularly in Japan. Popular app games have begun making use of the LINE blockchain service to offer in game items. It also allows unique items to be transferred or sold to other users. This allows developers to have greater involvement in the off-server transactions for items in their games. Multiplayer games in particular can benefit from the extant secondary markets for the goods traded in-game to increase marginal profits and provide an alternative source of revenue that does not require additional content from developers.

Art and artists constitute the lion's share of contributors and vendors in the NFT market in Japan. From high-profile art installations to independent artists, NFT offer an expedient digital method to sell their works to buyers without being limited by geography. NFTs have also been used as “certificates of authenticity” by using QR codes on physical art to prove a piece is original. In addition to selling real art, art can be generated algorithmically on the blockchain and then sold to buyers. In a country like Japan, where its pop culture has fans globally, artists have been selling parts of their work to global customers. For example, manga artists for popular series can sell individual panels to collectors for potentially more than the completed work. Some markets like Nanakusa specialize in art and pay royalties to resale of NFTs on their marketplace.

It is unclear exactly which regulations apply to NFTs in Japan. Therefore, the applicability of the requirements to individual laws is to be considered after examining each NFT individually. In this regard, the Japan Cryptoasset Business Association (JCBA)^[1] and the Blockchain Content Association (BCA)^[2] have published their own guidelines as useful tools for understanding legal considerations and points to keep in mind when handling NFTs. The nature of NFTs raises issues of applicability to copyright law in the context of digital art and in the context of financial instruments, primarily to the Payment Services Act ("PSA") and the Financial Instruments and Exchange Act ("FIEA").

NFT marketplaces and online platforms are regulated under general online marketplace and e-commerce regulations in Japan. Various government agencies, including the Ministry of Economy, Trade, and Industry (METI) and the Ministry of Internal Affairs and Communication (MIC), regulate e-commerce in Japan. Consumer and personal information/data protection laws apply to the online marketplaces as well.  Also, all online retailers must follow the Specified Commercial Transactions Law regulated by the Consumer Affairs Agency.

Japan's Foreign Exchange and Foreign Trade Act sets out foreign investment restrictions generally, but to date there are no specific restrictions related to NFTs. Prime Minister Fumio Kishida announced at the Upper House Accounts Committee on March 28, 2022 that he was preparing to amend the Foreign Exchange and Foreign Trade Act in the current parliamentary session to strengthen the effectiveness of economic sanctions against Russia. As virtual currencies and similar assets can be used to evade sanctions,  there is a possibility that an amendment to the Foreign Exchange and Foreign Trade Act could result in restrictions that may affect NFTs.

^[1] Japan Cryptoasset Business Association: Announcement of NFT subcommittee 'NFT Business Guidelines 2nd Edition

^[2] Blockchain Content Association Guidelines

The PSA regulates cryptographic assets ("cryptoassets") in Japan (Article 2-5 of the PSA). To the extent that NFTs meet the definition of cryptoassets under the PSA, they are subject to regulation under the PSA in Japan accordingly. Under the PSA, cryptoassets are defined in one of two categories: Item 1 cryptoassets, and Item 2 cryptoassets.  Item 1 cryptoassets are those that meet all of the requirements of (a) to (c) below.  Item 2 cryptoassets meet the requirements of (b) and (c) below. Cryptoassets are those that:

1. can be used as payment for goods and services provided to an unspecified person and can be purchased and sold to and from an unspecified person;
2. have an electronically recorded property value that can be transferred using an electronic data processing system; and
3. cannot be denominated in Japanese currency, foreign currency or currency-denominated assets.

If NFTs fall under the category of cryptoassets as set out above, a person who buys, sells or exchanges them, or manages cryptoassets for others as a business is required to register as a cryptoasset exchanger (Article 63-2 of the PSA).

To the extent that NFTs are considered a security, FIEA provisions would apply. The FIEA covers shares, bonds, and fund interests in tokens or cryptoassets. NFTs are not currently listed as a security under the FIEA but if a certain NFT involved profit sharing, this could change its classification to be a security. The FIEA does not directly regulate the sale of various cryptocurrencies that utilize the blockchain. However, it does regulate derivatives of cryptoassets that are traded on various security exchanges such as funds that are tied to cryptocurrencies or cryptoassets.

In addition, we note that cryptocurrencies can be, and regularly are, used to purchase NFTs from online NFT marketplaces in Japan.

Depending on where sales will be taking place, the data and privacy regulations can apply to ensure sufficient security measures are in place to protect user data. In Japan, this would be the Act on the Protection of Personal Information (APPI). Given that there have been several high-profile leaks of crypto data previously, scrutiny on security is quite high. Professional advice on data protection policies and security measures is recommended for any businesses that seek to become involved with NFTs in Japan, particularly for cross-border transfers, as such transfers create particular issues of compliance and liability.

Protection of IP rights would also present a challenge. Since NFTs have no official record of ownership beyond the transactions recorded on the blockchain, it is difficult to track who owns an NFT and can make use of it. Regulators in Japan have suggested that if exchanges keep a transaction history of NFTs, it may be easier to prove ownership as well as provide an accurate accounting for tax authorities. It has been suggested that this may also allow the original owner to be recorded for the purpose of asserting copyright and IP claims under their respective laws. Rights holders should have the benefits of these protections to stop infringement and reproduction of their unique works. Similarly, creators should track their sales and transfers to ensure that their works are not being reproduced without their permission.  Especially for creative works, a transfer of rights should be recorded along with the sale of the NFT.  

When selling or purchasing an NFT, the bill of sale or contract should explain the terms and rights being transferred with the item itself. This will help to clarify any disputes over ownership and outline any future payments of royalties or other obligations. The agreement should also address any ancillary data that exists both on and off the blockchain to ensure the entirety of the asset being purchased is covered by the sale. Professional legal advice would be beneficial to avoid any unwanted obligations, ensure successful transfer of ownership, and understand what practices are best for clarity in repeated or frequent transactions in Japan.

It remains to be seen whether NFTs will continue to grow in popularity in Japan or how the underlying technology will develop further. Technology enthusiasts throughout Japan will no doubt continue to find ways to capitalize on NFTs whether through gaming, art, or other industries. However, regulation in this area in Japan is slow to develop. As such, without further regulatory certainty, it remains unclear the extent to which NFTs and the industries making use of them will continue to develop.