Japan Unlocks Opportunities for Domestic Venture Capitalists to Invest in Web3 Startups

On February 16, the Ministry of Economy, Trade and Industry (METI) disclosed that the Japanese cabinet has approved a proposal allowing domestic venture capitalists (VCs) to invest in Web3 startups. The legal reform will enable Japanese VCs to participate in projects issuing virtual currencies, previously limited to international investors.

Japan Encourages Local VCs To Invest In Web3

According to METI, the approved revision entails amendments to four key acts. One of these four important acts adopted by the ministry is the Act on Investment Limited Partnership Agreement.

This particular act seeks to stimulate the development of startup companies and sectors by increasing domestic investments. The legal reform will allow Japanese venture capitalists to gain the ability to invest in projects exclusively issuing virtual currencies.

Japan to allow certain VCs direct investment in crypto and Web3 startups, potentially unlocking significant opportunities for local projects.🇯🇵

— Moby Media (@mobymedia) February 19, 2024

Additionally, limited partnerships (LPs) stand to benefit from this legal reform. LPs are investment partnerships formed to invest in unlisted venture companies. It is typical for VCs to invest in startup companies via LPs, as it allows them to invest with limited liability.

Prior regulations restricted the transfer of virtual currencies when receiving investments from LPs, however; only stocks and similar assets could be transferred. Consequently, Japanese Web3 startups frequently sought backing from international investors.

Meanwhile, the amendment now permits LPs in Japan to invest in medium-sized companies and startups involved in cryptocurrencies. With these new regulations, the Web3 community anticipates an increase in the number of crypto and blockchain startups originating from Japan.

This move has been welcomed by the industry, as it reduces barriers for Web3 companies in Japan. For greater clarity, the ministry’s announcement detailed that the Japanese cabinet approved the bill, and it has now been submitted to the legislative body for deliberation.

Other acts amended include the Industrial Property Information and Training Center Act, the New Energy and Industrial Technology Development Organization Act, and the Industrial Competitiveness Enhancement Act.

These amendments further support Japan’s intent to promote crypto adoption within its borders.

Web3 Startup Investment Opens in Japan

Japan wants to boost the agility and efficiency of its investment environment by streamlining bureaucratic processes and minimizing administrative obstacles.

For instance, late last year, the Japanese cabinet approved a revision to the 2024 tax regime.

As reported by Cryptonews, this move will exempt corporations from paying taxes on unrealized gains from cryptocurrencies if they hold onto the assets for an extended period.

Currently, third-party-issued cryptocurrencies held by corporations are referred to as either profits or losses based on the difference between their market value and book value at the fiscal year’s end.

The proposed revision will abolish this mark-to-market valuation for long-term holdings. This change implies that companies would only be taxed on the profits realized from the actual sale of cryptocurrency.

This potential change in the tax framework follows a clarification by the country’s tax agency in June 2023. They noted that crypto issuers would not be subject to the approximately 35% capital gains tax on unrealized gains.

Additionally, in June 2023, Japan’s Prime Minister, Fumio Kishida, expressed that web3 is an opportunity for Japanese “economic growth.”

Consequently, the Prime Minister emphasized the government’s commitment to fostering an environment conducive to the advancement of web3.