Japan Opens Doors for Local Venture Capitalists to Fund Web3 Startups

On February 16, the Ministry of Economy, Trade and Industry (METI) announced that the Japanese cabinet has sanctioned a proposal permitting local venture capitalists (VCs) to invest in Web3 startups. This legal reform will allow Japanese VCs to engage in projects that issue virtual currencies, which were previously restricted to foreign investors.

Japan Promotes Local VCs to Invest in Web3

As per METI, the approved modification involves changes to four significant acts. One of these key acts revised by the ministry is the Act on Investment Limited Partnership Agreement.

This specific act aims to encourage the growth of startup enterprises and sectors by enhancing domestic investments. The legal reform will empower Japanese venture capitalists to invest in projects that exclusively issue 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

Moreover, limited partnerships (LPs) are expected to gain from this legal reform. LPs are investment partnerships created to invest in unlisted venture firms. It is common for VCs to fund startup companies through LPs, as this structure allows them to invest with limited liability.

Previous regulations limited the transfer of virtual currencies when receiving investments from LPs; only stocks and similar assets were transferable. As a result, Japanese Web3 startups often sought investment from international backers.

Now, the amendment allows LPs in Japan to invest in medium-sized enterprises and startups engaged in cryptocurrencies. With these new regulations, the Web3 sector anticipates a rise in the number of crypto and blockchain startups emerging from Japan.

This initiative has been positively received by the industry, as it lowers barriers for Web3 firms in Japan. For further clarity, the ministry’s announcement specified that the Japanese cabinet approved the bill, which has now been forwarded to the legislative body for consideration.

Other acts that have been 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 reinforce Japan’s aim to encourage crypto adoption within its territory.

Web3 Startup Investment Opens in Japan

Japan aims to enhance the agility and efficiency of its investment landscape by simplifying bureaucratic procedures and reducing administrative hurdles.

For example, late last year, the Japanese cabinet approved a revision to the 2024 tax framework.

As reported by Cryptonews, this change will exempt corporations from taxation on unrealized gains from cryptocurrencies if they retain the assets for a prolonged period.

Currently, third-party-issued cryptocurrencies held by corporations are classified as either profits or losses based on the disparity between their market value and book value at the end of the fiscal year.

The proposed revision will eliminate this mark-to-market assessment for long-term holdings. This alteration indicates that companies would only incur taxes on the profits realized from the actual sale of cryptocurrency.

This potential modification in the tax structure follows a clarification from the country’s tax agency in June 2023, which stated that crypto issuers would not be liable for the approximately 35% capital gains tax on unrealized gains.

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

As a result, the Prime Minister underscored the government’s dedication to creating an environment favorable for the development of web3.

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