What is Crypto assets Lending? Explaining Two Legal Points of Discussion

Profiting from crypto assets is not only possible through buying and selling, but also through crypto assets lending.

This article provides an overview of crypto assets lending and the legal regulations related to it, aimed at businesses considering offering crypto assets lending services. It is important to understand these aspects when considering your business model.

What is Crypto assets Lending?

Crypto assets lending refers to a system where the holder of a crypto assets lends it for a certain period of time, and in return, pays a usage fee to the holder of the crypto assets.

Crypto assets lending is also referred to as “loaning crypto assets”. Simply put, it’s a system where you lend your crypto assets and receive rent in return.

When trying to make a profit from buying and selling crypto assets, you need to frequently check price movements and sell at the right time. If you miss the timing and sell when the price of the crypto assets has fallen, you may incur a loss.

However, in the case of crypto assets lending, while you are somewhat affected by a drop in the value of the crypto assets, you can receive a usage fee by lending the crypto assets, allowing you to generate a stable profit. Furthermore, while you are lending the crypto assets, the value of the crypto assets that has fallen may recover.

Therefore, while it may be difficult to make a large profit from crypto assets lending, it can be said to be a method that allows you to make a stable profit with relatively little effort.

Examples of Crypto assets Lending Services in Japan

In Japan, several crypto assets exchanges offer lending services. As of November 2022, the following crypto assets exchanges provide lending services:

• LINE BITMAX
• GMO Coin
• Coincheck
• BIT Point

Please note that the types of crypto assets handled, the minimum transaction amount, and fees, etc., vary depending on the crypto assets exchange.

Furthermore, FUELHASH[ja], a company engaged in Bitcoin mining business, has announced its entry into the crypto lending business targeting individual investors in Japan. According to the announcement, the company will proceed with this business in partnership with a business operator that has obtained the ‘Capital Market Service License’ from the Singapore Monetary Authority.

Two Key Issues in Crypto assets Lending

When it comes to the regulation of crypto assets lending, the two main issues are whether it falls under the category of crypto assets exchange business and whether it falls under the category of money lending business.

In the following, we will explain the applicability of crypto assets lending to the crypto assets exchange business and the money lending business.

Applicability of Lending to Crypto assets Exchange Business

The crypto assets exchange business is defined in Article 2, Paragraph 7 of the Japanese Payment Services Act.

7. In this Act, “crypto assets exchange business” refers to any of the following acts conducted as a business, “exchange of crypto assets, etc.” refers to the acts listed in the first and second items, and “management of crypto assets” refers to the act listed in the fourth item.

1. Buying and selling of crypto assets or exchange with other crypto assets

2. Mediation, brokerage, or agency of the act listed in the previous item

3. Management of users’ money in relation to the acts listed in the previous two items

4. Management of crypto assets on behalf of others (excluding cases where there are special provisions in other laws regarding conducting such management as a business).

In order for crypto assets lending to be considered a crypto assets exchange business, it must meet the above requirements. Upon checking the above requirements, it can be seen that crypto assets lending does not meet any of them, and therefore, it is considered not to fall under the category of crypto assets exchange business.

However, if what is called crypto assets lending is judged to be managing others’ crypto assets when viewed in substance, it may fall under “managing crypto assets on behalf of others” (Article 2, Paragraph 7, Item 4 of the Payment Services Act).

Therefore, when conducting a crypto assets lending business, care must be taken not to be judged as managing others’ crypto assets in substance. The regulations applicable in case of falling under the crypto assets exchange business are explained in detail in the following article.

Related article: What is Custody Business? Explanation of Regulations for Crypto assets Exchanges[ja]

Applicability of Lending to Money Lending Business

The money lending business is defined in Article 2, Paragraph 1 of the Japanese Money Lending Business Act.

(Definition)

Article 2. In this Act, “money lending business” refers to the act of lending money or mediating money lending (including the provision or receipt of money by discounting bills, selling collateral, or other similar methods. Hereinafter referred to simply as “lending”) as a business. However, the following are excluded.

1. Conducted by the state or local public entities

2. Conducted by those who have special provisions in other laws regarding conducting lending as a business

3. Conducted in conjunction with transactions by those who conduct the business of selling, transporting, storing, or mediating the sale of goods

4. Conducted by a business operator for its employees

5. Conducted by those who are determined by Cabinet Order to conduct lending that is not likely to harm the interests of fund demanders, etc., other than those listed in the previous items

If crypto assets lending falls under the above definition of money lending business, it will be subject to regulation as a money lending business.

Therefore, the issue is how crypto assets is treated under the law.

The Payment Services Act provides the following definition of crypto assets in Article 2, Paragraph 5.

5. In this Act, “crypto assets” refers to the following. However, it does not include those that represent electronic record transfer rights as defined in Article 2, Paragraph 3 of the Financial Instruments and Exchange Act (Act No. 25 of 1948).

1. Property value that can be used to purchase or rent goods, or receive services, and can be used against unspecified persons for the settlement of these prices, and can be bought and sold with unspecified persons (limited to those recorded by electronic means on electronic devices or other objects, excluding Japanese currency, foreign currency, and currency-based assets. The same shall apply in the following item.), and can be transferred using an electronic information processing organization

2. Property value that can be exchanged with the property value listed in the previous item with unspecified persons, and can be transferred using an electronic information processing organization

On the other hand, the Money Lending Business Act does not provide a definition of crypto assets. The Money Lending Business Act assumes the lending of money, not crypto assets.

Since crypto assets is not considered money under the law, it is believed that lending of crypto assets does not fall under money in the Money Lending Business Act.

Therefore, crypto assets lending is not considered to fall under the money lending business as defined in the current Money Lending Business Act, and is not subject to the regulations of the Money Lending Business Act.

Conclusion: Consult a Lawyer Regarding Crypto assets Lending

In this article, we have explained the overview and legal regulations related to crypto assets lending, targeting businesses considering engaging in crypto assets lending.

Simply lending or borrowing crypto assets does not meet the requirements of a crypto assets exchange business. However, if you are effectively ‘managing’ someone else’s crypto assets, there is a possibility that it could be considered a crypto assets exchange business. On the other hand, current money lending businesses only target lending money, so it is believed that crypto assets lending does not fall under this category.

For crypto assets lending, in addition to legal knowledge, knowledge about crypto assets is also required. If you are considering a crypto assets lending business, we recommend consulting with a lawyer who has specialized knowledge in advance.

Introduction to Our Firm’s Measures

Monolith Law Office is a legal office with high expertise in both IT, particularly the internet, and law. Our firm provides comprehensive support for businesses involved in crypto assets and blockchain. Details are provided in the article below.

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