What are the Legal Issues and Necessary Conditions for Introducing a Tipping Service via Streaming?

Recently, live streaming apps that allow tipping, such as 17LIVE and Pococha, have become popular.

Nowadays, the tipping service, introduced as “Super Chat” on YouTube, is gaining recognition. However, when starting such a service, there are legal points to be careful about in relation to the ‘Japanese Funds Settlement Act’.

In this article, for those considering starting a tipping service, we will explain what points need to be taken into account while referring to the recently amended ‘Japanese Funds Settlement Act’.

What is a Tipping Service?

A tipping service is a feature available on live streaming apps and similar platforms, which allows viewers to send money or its equivalent to the streamers.

Notable examples include:

• “Super Chat” on YouTube
• “Show Gold” on the live streaming app SHOWROOM
• “TikTok LIVE Gifting” on TikTok Live
• “Tips” on X(Twitter)

These services are not limited to videos; they can also be used to tip for text, photos, or illustrations.

Tipping has several benefits, such as boosting the motivation of the streamers and enabling viewers to directly support them.

Registration as a Funds Transfer Service Provider is Required for Tipping Services

Tipping services may fall under the category of “Funds Transfer Service Providers” as defined by the Japanese Payment Services Act (hereinafter referred to as the Payment Services Act), and if so, pre-registration as a Funds Transfer Service Provider is required.

Please note that to register, you must meet strict registration requirements as described later.

If you operate a funds transfer service without registration, you may be penalized as an unlicensed operator in violation of Article 4, Paragraph 1 of the Japanese Banking Act.

The Payment Services Act defines “Funds Transfer Service Providers” as follows:

“Funds Transfer Service” in this Act refers to the operation of foreign exchange transactions by entities other than banks.

Payment Services Act, Article 2, Paragraph 2

“Funds Transfer Service Provider” in this Act refers to those who have received the registration under Article 37.

Payment Services Act, Article 2, Paragraph 3

Those who have received the registration from the Prime Minister can operate a funds transfer service, notwithstanding the provisions of Article 4, Paragraph 1 and Article 47, Paragraph 1 of the Banking Act.

Payment Services Act, Article 37

In other words, a funds transfer service is a foreign exchange transaction conducted by registered entities other than banks. This includes peer-to-peer money transfer services such as “LINE Pay” and “PayPay”.

It should be noted that the term “foreign exchange transaction” has been interpreted in case law as “the movement of funds using a certain mechanism without the need for physical transportation of cash” (Supreme Court Third Petty Bench decision, March 12, 2001).

Like banks, funds transfer service providers can also operate foreign exchange transactions as a business. However, unlike banks, they cannot accept deposits, so they can conduct transfers between accounts by opening accounts (bank accounts) to the necessary extent.

Even though services may seem similar in that they allow “person-to-person transfers,” the mechanisms applied vary. For example, “LINE Pay” is a “Funds Transfer Service,” “PayPay” is a “Prepaid Payment Instrument Issuer,” and “paymo” is a “Payment Collection Agent”…

We will explain the registration requirements for funds transfer services in detail later, but if you cannot meet these requirements, you will need to devise a way to avoid falling under the category of funds transfer services.

How to Operate a Tipping Service Without Being Registered as a Funds Transfer Service Provider

To operate a tipping service without being registered as a funds transfer service provider, you can consider filing a notification as an issuer of prepaid payment instruments.

Prepaid Payment Instruments

Prepaid payment instruments are those that you pay for in advance and can use as a means of payment for shopping, etc. This includes gift certificates, gift cards, and prepaid cards like Suica.

Prepaid payment instruments include:

• “In-house type” that can only be used for purchasing goods, etc. from the issuer (e.g., gift certificates that can only be used at the issuer’s store)
• “Third-party type” that can also be used for payment at stores or service providers other than the issuer

For example, the live streaming app “SHOWROOM” operates a tipping service by filing a notification as an issuer of in-house type prepaid payment instruments.

In SHOWROOM, viewers can purchase ShowGold in advance and tip the streamers with ShowGold.

However, this ShowGold is not paid directly to the streamers, but the operator of SHOWROOM pays a distribution fee calculated based on the number of viewers, etc.

Although it may seem like a regular tipping service at first glance, it differs from the traditional model in that the ShowGold sent by the viewer does not directly reach the streamer.

Obligations of Prepaid Payment Instrument Issuers

The Japanese Funds Settlement Act imposes obligations on businesses that issue prepaid payment instruments, considering user protection and transaction safety, such as:

• Notification obligation for issuers of in-house type prepaid payment instruments (when the unused balance exceeds the standard amount on the standard date)
• Registration obligation before issuing for issuers of third-party type prepaid payment instruments (registration is limited to corporations)
• Information provision obligation (obligation to display information such as the issuer’s name, available amount, usage period, etc.)
• Submission of a report within two months from the day after each standard date (financial documents such as balance sheets must also be attached)
• Asset preservation obligation (deposit of issuance guarantee money, etc.)
• Obligation to refund the unused balance when the service ends

Regarding the notification obligation when operating as an issuer of “in-house type” prepaid payment instruments, if the unused balance exceeds the standard amount (10 million yen) on the standard date (every March 31 and September 30), you must file a notification within two months from that standard date.

As for the asset preservation obligation, this means that you must preserve assets by depositing issuance guarantee money (at least half of the unused balance on the said standard date), etc.

By the way, points given with cards, depending on the issuance form, also fall under prepaid payment instruments.

Payment Collection Services Essentially Conducting Peer-to-Peer Transfers are now subject to Funds Transfer Business regulations due to legal amendments

Payment collection services are those in which the service provider receives payment on behalf of the seller from the buyer when paying for goods, and then passes this on to the seller of the goods.

For example, there was the split-bill app ‘paymo’ (service ended in 2019). This app claimed in its terms of service that it was a ‘payment collection service’ to avoid being subject to funds transfer business regulations.

However, even if it was called a ‘payment collection service’, it was essentially a service for transferring money between individuals, and it had long been an issue that registration as a funds transfer business was necessary from the perspective of user protection.

In response to this, a legal amendment in May of 2021 (Reiwa 3) stipulated that transactions that meet certain requirements among services that have been called ‘payment collection services’ are subject to ‘foreign exchange transactions’ and are regulated (Japanese Payment Services Act Article 2-2), and these requirements were clarified in the Funds Transfer Business Ordinance (Article 1-2).

Those who have a monetary claim (hereinafter referred to as the “recipient” in this article) accept funds as payment from those who make payments by entrusting from the recipient, acquiring monetary claims from the recipient, or other similar methods, or have others accept them, and move the funds to the recipient (excluding acts of moving by delivering the funds to the recipient), and those who meet the requirements set forth in the Cabinet Office Ordinance, including that the recipient is an individual (excluding those who become recipients for business or for business), shall be deemed to be foreign exchange transactions.

Japanese Payment Services Act Article 2-2

Therefore, in this amendment,

1. The act of moving money at the request of a person who has the right to demand payment (creditor) or a person who has the obligation to pay (debtor)
2. The fact that the creditor is an individual, not a business operator
3. Meeting other requirements stipulated by the Cabinet Office Ordinance

transactions which meet these three requirements are now considered to be ‘foreign exchange transactions’. The split-bill app meets these requirements, so it is said that as a result of the amendment, registration as a funds transfer business became essential.

The reasons for this include the fact that the split-bill app is a service specialized in money transfer functions and can be seen as equivalent to a funds transfer business, and the need to ensure user protection is high because if the service provider goes bankrupt, the operator does not need to preserve a certain amount of money, and both creditors and debtors may suffer damage.

Requirements for Registration and Obligations After Registration in the Funds Transfer Business

To register as a funds transfer service provider, the following main requirements must be met:

1. Being a corporation or a foreign funds transfer service provider with a business office in Japan
2. Having the financial foundation necessary to properly and reliably carry out the funds transfer business
3. Having a system in place to properly and reliably carry out the funds transfer business
4. Not using a trade name or name identical or similar to that of other funds transfer service providers

Furthermore, after registration, there are many obligations, such as the following:

1. Preservation of performance bonds
2. Taking measures to protect users
3. Response to the out-of-court dispute resolution system (financial ADR system)
4. Preparation and submission of reports

Each of these will be explained below.

As a result of the legal revision in May of 2021 (Reiwa 3), the amount of funds transferred has been newly divided into “Type 1 (no limit on amount)”, “Type 2 (amount equivalent to 1 million yen)”, and “Type 3 (amount equivalent to 50,000 yen)”, and the regulatory content varies according to the type.

When registering, you need to decide which type of funds transfer business to operate based on the handling amount of the service you plan to provide.

Reference: What is the Funds Settlement Act (Japan Funds Settlement Association)

Main Registration Requirements for the Funds Transfer Business

According to Article 40, Paragraph 1 of the Funds Settlement Act, the main registration requirements for the funds transfer business are as follows:

1. Being a “corporation” or a “foreign funds transfer service provider with a business office in Japan”

You must be a corporation or a business operator with a branch in Japan that is registered as a funds transfer business and conducts foreign exchange transactions under foreign laws and regulations.

2. Having a “financial foundation deemed necessary to properly and reliably carry out the funds transfer business”

• Whether the business operator could fulfill the obligation to deposit performance bonds, etc..
• Whether the business operator have a system in place to smoothly handle the transfer of funds to users.
• Whether the business operator has established countermeasures for all possible situations regarding your financial outlook, and has established a plan that can expect a certain level of profit even in such cases.

Business operators are evaluated for their financial foundation from these perspectives.

The “performance bond” is a fund in the process of transfer that the business operator is obliged to preserve 100% or more. There is no quantitative standard for the financial foundation required of funds transfer service providers.

3. “Establishment of a system to properly and reliably carry out the funds transfer business” and “Establishment of a system necessary to comply with the provisions of Chapter 3 Funds Transfer”

It is necessary to ensure that sufficient business operations and business management are carried out to fulfill obligations such as asset preservation obligations stipulated in the Funds Settlement Act and to carry out remittance operations.

4. Not using a trade name or name identical or similar to that of other funds transfer service providers

If the trade name or name is identical or similar to that of other funds transfer service providers, there may be a lack of protection for users.

In addition to this,

• Not having had the registration of a funds transfer business or the license of a funds settlement business revoked, or a similar registration or license revoked under the provisions of foreign laws equivalent to the Funds Settlement Act, the Banking Act, etc., in the past five years
• Not having been fined or subjected to a foreign penalty equivalent to this for violating the Funds Settlement Act, the Banking Act, etc., the Capital Subscription Law, or foreign laws equivalent to these in the past five years
• Other businesses not being contrary to the public interest
• There being no disqualified persons among the directors, etc.

There are also such requirements.

Obligations After Registration in the Funds Transfer Business

After registration, the following four regulations are mainly imposed:

1. Preservation of performance bonds
2. Measures for user protection
3. Response to the financial ADR system
4. Preparation and submission of reports

1. Preservation of Performance Bonds

Funds transfer service providers must preserve an amount equal to or greater than 100% of the funds in transit as performance bonds.

The “required performance bond amount” is calculated as the “amount of unfulfilled obligations on each business day for each type of funds transfer business + the amount of costs related to refund procedures”.

You need to grasp the required performance bond amount for each type of funds transfer business on each business day.

2. Measures for User Protection

Funds transfer service providers need to take measures to protect users. Specifically, these are as follows:

(1) Measures to prevent users from mistaking with the foreign exchange transactions conducted by banks, etc.

(2) Provision of information on contract contents such as fees related to foreign exchange transactions

(3) Provision of information on the content of user funds preservation and the handling of unauthorized transactions

(4) Establishing internal rules, etc., and conducting training for employees

3. Response to the Financial ADR System

Funds transfer service providers need to respond to the out-of-court dispute resolution system (financial ADR system).

The financial ADR system, also known as the out-of-court dispute resolution system, is a system to resolve disputes through discussion without going to court, with the mediation of a fair third party. The funds transfer business is subject to this system, and you must take measures for related complaint handling and dispute resolution.

4. Preparation and Submission of Reports

Funds transfer service providers need to create and preserve documents related to their business.

In addition, documents such as a business overview, a document describing the status of income and expenditure related to the funds transfer business, a balance sheet, and an income statement must be submitted to the Commissioner of the Financial Services Agency within three months from the end of the business year.

Summary: Consult Lawyers in Building a Tipping Service via Live Streaming

If your tipping service falls under the category of a funds transfer business, you will need to register as a funds transfer service provider. The registration process requires meeting strict criteria, so if it seems difficult to register, you should carefully consider how to structure your service so that it does not fall under the funds transfer business category.

However, laws such as the Japanese Funds Settlement Act are complex, and tipping services are a new type of service. Therefore, discussions are still ongoing about which services are subject to regulation as funds transfer businesses.

If you start your service and later find out that you needed to register as a funds transfer business, you may be forced to suspend your service.

If you have any concerns, it is advisable to consult with a lawyer who is knowledgeable about IT and funds settlement laws before starting your service.

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Monolith Law Firm is a legal office with high expertise in both IT, particularly the internet, and law. There are areas that require legal checks when operating media. Our firm handles everything from strategic planning related to intellectual property in IT and internet-related businesses, and entertainment fields such as music and movies, to contract relationships and litigation. We also have experience and know-how in various tasks, from creating internal guidelines for companies regarding issues related to the operation of media, to conducting due diligence (DD) in M&A.