[2025 Latest Edition] Legal Interpretation of Crypto Assets (Crypto assets): Securities Applicability and Points of Caution for Operators

Crypto assets, also known as digital assets, are subject to constantly evolving legal interpretations due to their diverse types, uses, and the advancement of transaction methods. A particularly important issue is whether crypto assets fall under the category of securities.

This article aims to explain the legal interpretation of crypto assets, especially their relationship with securities, targeting businesses that operate in the realm of digital assets.

Traditional Perspectives and Emerging Trends in Crypto assets (Virtual assets)

Traditionally, crypto assets such as Bitcoin and Ethereum, which function as mediums of monetary value, were primarily viewed as “commodities” and not included in securities.

However, in recent years, crypto assets with diverse functions have emerged, not only serving as mediums of value but also providing rights to use services, voting rights in business ventures, and entitlements to profit distributions. These multifunctional crypto assets also possess investment aspects, creating a situation where the conventional uniform classification as “commodities” is no longer sufficient.

The Debate on Ethereum’s Consensus Algorithm Change and Securities

Particularly noteworthy is the change in the consensus algorithm of Ethereum, a top market capitalization crypto assets, from Proof of Work (PoW) to Proof of Stake (PoS). This shift has sparked discussions about whether it could increase the likelihood of Ethereum being classified as a security.

What is a Consensus Algorithm?

A consensus algorithm is a mechanism used in blockchain technology to achieve agreement on the verification of transactions and the addition of new blocks.

To understand consensus algorithms, it is necessary to comprehend the workings of crypto assets.

In crypto assets, a system called blockchain is utilized, where mining verifies transactions and ensures the security of the blockchain. A consensus algorithm is the method used to form a consensus (agreement) on the rules for adding blocks to the blockchain.

Related article: What Makes Blockchain a Revolutionary Technology?

Changes to Ethereum’s Consensus Algorithm

Traditionally, Ethereum employed the PoW (Proof of Work) consensus algorithm, which is also used by Bitcoin and others.

Subsequently, in September 2022, Ethereum transitioned from the traditional PoW (Proof of Work) to PoS (Proof of Stake).

• PoW (Proof of Work): A method where consensus is reached by competing for computational resources. Adopted by Bitcoin and others.
• PoS (Proof of Stake): A method where the right to generate blocks is granted based on the amount of crypto assets held. Adopted by Ethereum.

The move to PoS by Ethereum was motivated by the goal of addressing the issue of high energy consumption associated with PoW.

The Latest Views from U.S. Authorities on Crypto assets (Virtual assets)

Here, we introduce the evolution of the U.S. authorities’ views on crypto assets (virtual assets).

The Introduction of Ethereum Spot ETFs

In September 2022, Gary Gensler, the chairman of the U.S. Securities and Exchange Commission (SEC), suggested that crypto assets adopting Proof of Stake (PoS) could likely be considered securities. He did not mention specific names, but his statement came right after Ethereum’s transition to PoS, drawing significant market attention.

Then, in May 2024, an Ethereum spot ETF was approved in the United States. This development suggests that U.S. regulatory authorities may not fully consider Ethereum as a security, which could influence future interpretations.

Determining the Security Status of Crypto assets: The Howey Test

In the United States, the Howey Test is primarily used to determine whether a crypto assets is considered a security. The Howey Test is based on the following four criteria:

• Whether funds are being raised
• Investor expectation (whether there is a reasonable expectation of profits derived from the efforts of others)
• Whether it is a common enterprise
• The possibility of profits

However, the Howey Test is not an absolute standard and is judged according to individual cases.

Regulation and Recent Trends of Crypto Assets in Japan

In Japan, crypto assets are regulated under the Payment Services Act, but if a specific crypto asset is deemed to be a security, it will also be subject to the regulations of the Financial Instruments and Exchange Act.

Related article: What is the regulation of crypto assets? Explaining the relationship between the Payment Services Act and the Financial Instruments and Exchange Act

Regulations on the Issuance of Securities in Japan

When a crypto asset is deemed to be a security, the issuance of such an asset would be subject to the regulations concerning the issuance of securities. Specifically, the following regulations may apply:

• Disclosure of Securities Registration Statement (Article 5 of the Financial Instruments and Exchange Act)
• Provision of Prospectus to Parties (Article 15, Paragraph 2 of the Financial Instruments and Exchange Act)
• Submission of Securities Report (Article 24 of the Financial Instruments and Exchange Act)
• Submission of Quarterly Reports (Article 24-4-7 of the Financial Instruments and Exchange Act and Article 4-2-10, Paragraph 3 of the Financial Instruments and Exchange Enforcement Order)

Regulations Related to Transactions Under Japanese Law

Furthermore, if a crypto asset is deemed to be a security, it may become subject to the regulations governing securities transactions. Specifically, the following regulations could apply:

• Insider trading regulations (Article 166 and Article 167 of the Japanese Financial Instruments and Exchange Act)
• Market manipulation regulations (Article 159 of the Japanese Financial Instruments and Exchange Act)
• Regulations on the dissemination of rumors (Article 158 of the Japanese Financial Instruments and Exchange Act)
• Regulations on fictitious transactions (Article 159 of the Japanese Financial Instruments and Exchange Act)

Recent Trends in Legal Revisions in Japan

In the realm of taxation related to crypto assets, the tax reform of Reiwa 4 (2022) has led to a revision of the valuation methods for certain crypto assets held by corporations. While the capital gains from the transfer of personal crypto assets are still generally treated as miscellaneous income under comprehensive taxation, discussions continue on tax reforms, including the introduction of a separate declaration taxation system.

Reference: National Tax Agency | Tax Treatment of Crypto assets and Other Virtual Assets (Information)

Regarding amendments to the Financial Instruments and Exchange Act, the Financial Services Agency of Japan is considering classifying crypto assets as “financial products” and introducing regulations on insider trading. In April of Reiwa 7 (2025), the Financial Services Agency has submitted a related draft amendment.

Reference: Financial Services Agency | Review of the Regulatory Framework Related to Crypto assets (April 10, Reiwa 7/2025)

Furthermore, with the enforcement of the Travel Rule in June of Reiwa 5 (2023), which mandates notification obligations related to the transfer of crypto assets and electronic payment methods, as well as the strengthening of segregated management of customer assets, regulations on crypto assets exchange operators have also been enhanced.

Conclusion: Consult a Lawyer Regarding Crypto assets Regulations

The determination of whether crypto assets (virtual assets) qualify as securities is still challenging at the current time. However, it cannot be denied that multifunctional crypto assets, in particular, may be considered securities.

Business operators dealing with crypto assets must always keep an eye on the latest legal regulations and trends both domestically and internationally, and establish a system that can respond effectively if the crypto assets they handle are deemed securities.

The legal regulations concerning crypto assets are expected to continue evolving. If you have any uncertainties or concerns, we recommend consulting with an attorney who possesses specialized knowledge in this field.

Guidance on Measures by Our Firm

Monolith Law Office is a law firm with high expertise in both IT, particularly the internet, and legal matters. In recent times, the business related to crypto assets, which has been garnering significant attention, requires a high level of specialization and legal checks. Our firm analyzes the legal risks associated with businesses that have already started or are about to start, considering various Japanese legal regulations. We strive to legalize the business operations without halting them, as much as possible. Details are provided in the article below.

Areas of practice at Monolith Law Office: Crypto assets & Blockchain