[Research] Japan’s Web3 Trends in 2022
Japan is seeing a surge in Web3 adoption, driven by government support, changing perceptions of digital assets, and unique applications such as membership-based NFTs.
Intro
The year 2022 marked a significant milestone for the Web3 ecosystem in Japan. The Japanese government established a “Web3 Policy Office”, and startup conferences—finally—began hosting side conferences for Web3 and crypto. The Nikkei even ran a full-page advertisement for a Mainnet project. Japanese society is becoming more receptive to Web3 and recognizing it as a trend. As a result, many global projects are seeking opportunities in Japan, and Japanese projects are gaining interest from global investors.
But really, why now? There are several reasons for this:
Isolation from the global market provides confidence during the recession
Strict regulations enabled risk management and minimized the downsides
The Kishida administration shows pro-Web3 stances
NFTs and Web3 games ignite the utility of Japan’s intellectual properties and legacies
The negative connotation of “virtual” assets changes with the adoption of the term “Web3”, seen as ushering in a new paradigm for the Internet
This article will explore three key characteristics of the Japanese Web3 industry, including the aforementioned reasons.
1. The Community Remains Strong
The crypto industry in Japan has struggled to keep up with trends, such as the rapid growth of De-fi in 2019. Japan, along with Korea, had strong centralized exchanges, but the Coincheck Hack of January 2018, which resulted in a loss of $500 million, caused the government and financial authorities of Japan to launch a comprehensive investigation of exchanges and suspend the issuance of new licenses. It delivered the final blow to the global crypto industry, which was already in shock as the South Korean Minister of Justice announced plans to shut down crypto exchanges. The long crypto winter has begun.
Japan has a history of being the root of crypto industry downturns. Mt. Gox, which accounted for 70-80% of global Bitcoin trading volume in 2014, was also a Japanese company headquartered in Shibuya. The company filed for bankruptcy protection after losing 850,000 bitcoin from a hack. These incidents have made it difficult for De-fi to thrive in Japan, a conservative country that has traditionally focused on hosting business models like exchanges rather than adopting cutting-edge technology such as smart contracts.
As regulations in the crypto industry became more stringent, Japanese entrepreneurs became more hesitant to take risks and grow their businesses. Some of them went overseas and kept building, but Japan as a whole was largely ignored in the global market. While other countries were surpassing Japan in the race, entrepreneurs in Japan often used regulatory difficulties as an excuse for the lack of growth in the Japanese market. However, the failure of industry leaders such as Terra and 3AC caused the Japanese community to reconsider their approach and realize they could be more successful in the long run. They started thinking: “Wait… so I can win a medal just by finishing the race?”
Moreover, the recent bankruptcy of FTX demonstrated the effectiveness of Japan’s strict regulatory focus on risk management. FTX was operating its Japan business through a subsidiary after acquiring a local exchange called Liquid and rebranding it to FTX Japan. As a result of Japan’s regulations, FTX Japan had its customer funds fully separated. It announced that it currently holds more than 100% of its customer funds. Since the funds will be excluded from Chapter 11 proceedings, it appears that FTX Japan’s account holders will be able to fully recover their funds, though it would take some time.
As the global crypto industry meets the third winter and experiences a series of bankruptcies, the Japanese market remains unscathed — because there wasn’t much there in the first place — and the community is more confident than ever.
2. Taxation and the Dubai Exodus
With this momentum, a significant number of Japanese entrepreneurs are moving overseas for their businesses. As they come out of their comfort zone for the first time, they are drawn to Dubai, the third-generation hub of the Web3 industry. Switzerland, the first-generation hub until 2017, is declining in popularity, and Singapore, the second-generation hub, is facing increased regulatory strictness. Hence, Dubai becomes the most attractive option for them.
One of the main reasons why Japanese entrepreneurs are leaving the country is tax issues. Currently, Japan taxes corporations on their unrealized gains from cryptocurrencies, with an effective tax rate of around 30%. This can be a significant burden for companies that own large amounts of cryptocurrency at the end of their fiscal year. In addition, crypto gains of individuals are classified as “miscellaneous income” and are not eligible for separate taxation, leading to a maximum effective tax rate of 55%. The crypto industry in Japan has long criticized and asked for changes to these tax policies, but there has been no progress. However, as the Kishida administration began introducing Web3-friendly policies, it seems at least companies that have issued their own cryptocurrency will be exempted from taxation on unrealized gains starting next year.
Nonetheless, relocating to Dubai is a more attractive option for Japanese entrepreneurs than waiting for Japan’s tax policies to change, as income taxes for individuals and corporate taxes for companies in free-trade zones are exempt in Dubai. The author has already seen a two-digit number of Japanese entrepreneurs moving or planning to move to Dubai this year. Likely, it is the largest migration of Japanese entrepreneurs since the 2000s. The Japanese community in Dubai has reached its critical mass and will continue to grow.
As an alternative, there are movements attempting to address this issue by relocating within Japan. Aogashima, a volcanic island located approximately 220 miles (360 kilometers) from Tokyo, is a typical example. With less than 170 people, it has the smallest population of any island in Japan but a relatively youthful demographic. Noritaka Okabe, the founder of JPYC, is working to convince Aogashima’s inhabitants to turn the island into a “special blockchain zone,” offering incentives for Web3 companies. In the long term, he hopes to transform the local community into DAOgashima, a meme that has gained popularity and many fans.
3. Membership-based NFTs and Web3 Games
Unfortunately, Japan has not been able to take the lead in the development of Web3 technology, and this is likely to continue for the foreseeable future. As mentioned earlier, Japanese projects tend to focus more on business models rather than technology. This is partly due to the limited number of developers in the industry and the fact that non-developers in Japan have a relatively limited understanding of the technology compared to other regions. However, Japan’s large market size and strong purchasing power, particularly the tendency of Japanese consumers to spend generously on things they enjoy, combined with the Otaku subculture, have created a strong demand for NFTs. As a result, there are many NFT projects that wrapped the membership economy. Here are some examples:
Not A Hotel is a hotel chain located in Fukuoka, Nasu, and Aoshima that operates on NFT memberships. Ownership of the “Membership S” grants the holder the right to stay at the hotel for one night every year for 47 years (the maximum durability of a hotel allowed under Japanese law). Membership Y and X entitle the holder to two and three consecutive nights at the hotel, respectively. The dates that the owner can stay at the hotel are fixed through a “reveal.” For example, owning a December 19th Membership S allows the holder to stay at the hotel on December 19th every year for the next 47 years, and a voucher NFT airdrop occurs 90 days prior to the stay (on October 2nd in this case). If the owner is unable to stay at the hotel, they can sell the voucher NFT for that year in the secondary market or dispose of the master NFT as a whole.
CryptoBar P2P is a small bar located in Ginza that operates through NFT memberships, which are available in daily, monthly, and yearly options. One interesting feature of the monthly pass is that it is only valid within that month rather than 30 days from the date of purchase. As a result, it may be more beneficial to purchase the NFT in the secondary market if you plan to visit the place beginning in the middle of the month. The annual pass allows the holder to enter with a guest. The bar is a free-flow (Nomihodai) once you are in, but some menu will require additional payment of its original P2P tokens, which is pegged to USDC.
Bonsai NFT Farm is an NFT project that offers subscriptions for Bonsai, the Japanese art of growing miniature trees in pots. Ownership of ten or more NFTs entitles the holder to quarterly bonsai deliveries. NFT ownership of 10 to 99 entitles the holder to small bonsais, while ownership of 100 or more entitles the holder to large bonsais. Due to strict regulations on plant quarantine, the delivery is currently only available within Japan. However, there are plans to expand the business to the US or UK through partnerships with local nurseries. (Disclosure: The author is a holder of this NFT).
These projects attempt to create practical use cases for Web3 rather than aiming to become global unicorns. While they may face challenges in going global, they are taking advantage of the improved liquidity—one of the biggest benefits of NFTs—to enable more people to access physical assets and contribute to the mass adoption of NFTs within Japan.
In the entertainment sector, the growth of Web3 games is particularly noticeable. Japan has numerous intellectual properties, including characters and games, and their potential of onboarding Web3 is coming to attention. Leading players in this field include Oasys, developed by Double Jump Tokyo, and Thirdverse, led by Hironao Kunimitsu, the founder Gumi. Oasys, an EVM-based Layer 1, has Japanese gaming giants such as SEGA and Bandai Namco as their validators. Thirdverse develops both VR games (Web2) and blockchain games (Web3) and has recently announced plans to launch a Web3 game in collaboration with Captain Tsubasa. It is worth noting that Thirdvese is a validator of Oasys, and Double Jump Tokyo is an investor in Thirdverse, so the two projects are closely intertwined. The fact that both projects practically have no competitors within Japan is a sign that the Japanese Web3 industry is still in its early stages and that the lack of competition in the Japanese startup industry also appears in Web3. (Disclosure: Hyperithm is an investor of Oasys.)
Outro
The full-page advertisement in the Nikkei mentioned earlier at the beginning was an advertisement titled “Japan as No.1 Again”, published on September 26th by Astar, a Parachain on Polkadot founded by Sota Watanabe. The thrust of the advertisement is that Japan, which used to be the world’s leader (in the era of the manufacturing industry), has an opportunity to lead the world again in the Web3 era—although it has been lagging in the Web2 era. Astar offered to cover the advertising costs fully and asked companies that agree with the purpose of the advertisement to include their logos, resulting in a total of 329 companies participating. A translated (and heavily paraphrased) version of the advertisement is included below.
Among the participants were some of the most conservative companies in Japan, such as UFJ Bank, the largest bank in Japan, and SOMPO Holdings, an insurance company with a market cap of 2 trillion yen. Just a couple of years ago, it would have been unimaginable for such companies to participate in a crypto-related advertisement, let alone for Nikkei to allow such ads. It is clear that as the perception of “virtual” currency has changed to the Web3 paradigm, Japanese social norms have also changed significantly.
Only time will tell whether Japan's Web3 industry will be able to keep its momentum and continue to make progress amid these rather-favorable conditions.
This nation was once best described as “Number One.” There were times when Japan was leading the world. Will it remain as a story of the distant past? No. We strongly believe that an opportunity for this nation is coming again.
Web3 is a revolution that connects society and empowers each individual. It’s a catalyst with the power to change everything: economics, culture, politics, and organizations.
In the Web3 era, our calling is to connect different blockchains and build a platform that smooths the way for the world.
The past is not to reminisce about; it is to overcome. The future is not to lament; it is to build upon. The time has come for Japan to open a new era.
Let us move forward. Let us build a new era.
Web3 can make it happen.
(Disclosure: Hyperithm has participated in this advertisement.)
About the Author
Lloyd is the founder and CEO of Hyperithm and a serial entrepreneur who founded this first start-up in his senior year at high school. After moving to Tokyo in 2017 to work for a Japanese family office and initially using Bitcoin as a cheaper way to remit his salary from Japan to Korea, he noticed the opportunity in the crypto B2B market and founded Hyperithm the following year. Lloyd majored in Political Science at Seoul National University and was listed in Forbes 30 Under 30 Asia 2022.
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