IDO Development In Japan, Legal Or Not?

ICO, IEO and IDO are some of the main ways in fundraising using cryptocurrency assets. As using ICO and IEO may have some risks and disadvantages, as well as the support for investors is not good, these methods are dying down.

On the other hand, IDO has become extremely outstanding from 2021. IDO is a token sale using DEX (Decentralized Exchange). In many cases, purchasing token in a cheaper price is possible, or sometimes it can push the list price into hundred times higher, it attracts a great deal of attention from investors.

In Japan, the appearance of DEX is still uncertain, and also there isn’t a considerable example about IDO development, so there are still many questions whether implementing IDO in Japan is legal or not. Registration to the government and its approval is essential for raising large funds.

About IDO

IDO (Initial DEX Offering) is a crypto-assets token aimed at event fundraising through a DEX (Decentralized Exchange). As DEX connects to all the blockchain terminals through P2P system without centralized management like CEX (Centralised exchange), it allows individual crypto-assets transitions.

IDO developers get fund by appealling investors through many ways of outlining fundraising purpose roadmap or detailed project description. DEX is a type of DeFi (Decentralized Finance) developed based on Ethereum blockchain which has smart contract function. Especially, in 2021, with the heat of Ethereum related businesses such as NFT or Metaverse, along with the expectation for its future, the attention level on IDO is becoming surprisingly higher and higher. In many cases, it can attract a great deal of money in just a short time as cheaper purchasing price and higher list price is possible.

Moreover, the cost in IDO is lower without verification like IEO, everyone can easily hold one. Maybe this, along with the popularity and trust that is gained in the Ethereum economy as described above, supports the rapid increase of IDO.

Also see：https://relipasoft.com/blog/dex-amm/

IDO in Japan, legal or illegal？

Everyone can hold a IDO without difficulties, so there may be some huge gap between the merits and demerits of the project description. As there can be some scam projects, careful checking is essential when deciding to invest.

From legal perspective, this risky IDO is maybe not problematic. There is rarely no cases of IDO development in Japan, mainly are DEX based projects outsourcing from overseas. But, from the present view, there will obviously be many projects which are familiar with IDO in a near future.

So, it is necessary to dig deeper into IDO from the legal perspective.

Against the Amendment Fund Settlement Act is illegal

When crypto-asset transactions are viewed from legal perspective, according to the “Amendment Fund Settlement Act (commonly known as the Virtual Currency Law in Japan)“, users are required to register as a “Crypto-asset exchange Company” to continuously buy and sell, exchange, act as a intermediation, agency or manage money.

In other words, if you do not officially register, even though you are continuously acting as an agency for crypto-asset transactions, it is against the Amendment Funds Settlement Act. There are many domestic Crypto-asset exchange Companies such as Coincheck, bitFlyer, GMO Coin…, but all of them operate a centralized cryptocurrency exchange (CEX), which is officially registered only after being examinated by the Financial Services Agency.

In the case of DEX, there is no managers like in CEX. Users trade crypto assets daily, but the mediator is Ethereum Smart contract (or a type of software feature), so, users do not just keep a wallet, they personally manage theirs without the intermediations from agencies.

Smart Contract, neither individual nor coporation

Smart contract is a computer protocol which is programmed to implement certain transitions according to predetermined conditions. It is automatically decided in agreement with the crypto-assets price and smart contract algorithm. In short, neither individual nor corporation acts as an intermediary of transitions, this becomes the issue of whether DEX and IDO are legal or not.

Under the Amendment Funds Settlement Act, crypto-asset traders are considered to be legal individuals or companies, and are not supposed to be DEX based on smart contract, which is an epoch-making function of Ethereum blockchain in the first place. Therefore, the Financial Services Agency does not recognize the existence of DEX, and the current situation is that the IDO conducted at DEX is not under legally control. In other words, it can not be said that IDOs are lawful or unlawful.

However, speaking exactly, there are some cases where even DEX may require registration with the Financial Services Agency, so let’s take a look about the illegal cases below.

Illegal cases are possible

Matching sellers and buyers is essential for successful cryptocurrency transactions. If there is a seller who wants to sell a proper amount of units of the crypto asset A, and a buyer who wants to buy the same quantity at the same price appears, the transaction is formed. However, even if there are sellers and buyers, they cannot be matched properly without the existence and function of the intermediaries.

In the conventional crypto-asset transactions including stock or debt exchanges that have been carried out at CEX, the order book model in which a centralized manager receives a commission in return for matching the seller and the buyer is common practice. However, DEX has implemented AMM (Automatic Market Maker), in which all these are done by smart contract. Therefore, as already mentioned, DEX is not a legally subject because it is intervened by computer protocols, not individuals or coporations.

However, there are few cases in DEX that utilize not only AMM but also the order book model. The order book is done off-chain outside the blockchain, and the settlement is done on the blockchain. In this case, in order to maintain the order book, at least one person will be involved, so strictly speaking, it is regarded as a “Crypto-asset exchange Company” under the Amandment Funds Settlement Act. Therefore, it may be considered illegal to operate this type of DEX without filling or registering with the Financial Services Agency and holding an IDO there.

In an extreme case, a stock exchange cannot operate trading functions without obtaining a license to be a “Financial instruments exchange” under the Financial Instruments and Exchange Act. What if a stock exchange is operated without permission and some company lists its shares and funds without permission? Needless to say, that it is clearly illegal.

AMM method is not considered illegal at the moment, but since DEX doesn’t require verification and can be held by anyone, project description is a mixture of goods and bads. Some are worth investment, while others have been evolved into fraud. If such risky and uncertain cases continue to occur frequently, it is quite possible that rules will become much stricter.

In conclusion,

IDO, allows speedy fundraising without verification, can push the list price of the token to hundred times higher, is attracting a great deal of attention from start-up enterprises and inventors who want to drive their projects forward.

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