Entertainment giant Sony Group Corp is the latest company to jump onto a bandwagon of Japanese businesses seeking to tap blockchain technology, a trend that poses challenges for the nation’s government.

Sony last month officially unveiled a digital ledger, Soneium, anticipating that developers will use it to create applications to enhance the firm’s offerings. Precisely how is a work in progress, but the broad idea is that intersecting Soneium with gaming, music and movies could yield opportunities.

Other Japanese firms exploring various blockchain-related initiatives include the likes of Nippon Telegraph & Telephone Corp, Toyota Motor Corp and Mitsubishi UFJ Financial Group Inc. The latter, Japan’s biggest bank, is looking into issuing stablecoins, a type of digital token meant to hold a constant value.

The question for the government is whether to heed requests from the crypto industry for less onerous rules to lower costs and spur growth. Regulators did move toward making it easier to list digital tokens at crypto exchanges under Prime Minister Fumio Kishida, who prioritized web3 - a term referring to a vision of the internet built around blockchains.

But his tenure is coming to an end and it is unclear if any of the leadership hopefuls vying to replace him will also champion web3, or further regulatory adjustments. One major bugbear for industry participants is that tax on gains from traditional investments is typically 20%, but for crypto as high as 55%.

“It will always take time for regulators to get comfortable with new business models and success will require a long-term investment of time and resources,” said Angela Ang, senior policy adviser at blockchain intelligence firm TRM Labs. Still, an “increasingly innovation-forward tone” from Japanese officials helps to explain why firms such as Sony are experimenting with digital ledgers, she said.

Japan rolled out stablecoin rules in 2023 and has a framework for crypto exchanges. Its tight regulations focus on investor protection and reflect lessons learned from foreign and local crypto collapses - such as the 2014 hack and subsequent bankruptcy of Tokyo-based Mt Gox, then the biggest Bitcoin trading venue. This year, Japanese platform DMM Bitcoin suffered a US$320 million breach.

Singapore-based crypto lender Amber Group sold its digital-asset trading platform in Japan to a unit of Sony last year. Before the disposal, Amber’s Managing Partner Annabelle Huang said the nation is a “very high quality market, but regulations are strict.”

Trading activity at Japanese digital-asset exchanges has begun to recover this year alongside a rally in Bitcoin and other tokens. Average monthly volumes are back near US$10 billion at centralised Japanese exchanges, up from US$6.2 billion in 2023, according to figures from CCData.

While the potential of the digital-asset market in Japan might be attractive, licensing rules can be onerous, according to Yuya Hasegawa, market analyst at crypto exchange Bitbank Inc. “Friction always came up when we were trying to start a new business,” he said, referring to efforts to start a custody operation.

For Sony, projects dotted across the blockchain sector provide clues about the possibilities for Soneium. For instance, some startups enable the trading of in-game sprites, while others are exploring new ways of copyrighting and monetising artistic output. Such uses are still evolving, and whether digital-ledger applications have a long-term future remains a point of debate.

“We believe that entertainment-related businesses operating on a web3 platform will continue to expand in the future,” said Jun Watanabe, chairman of Sony Block Solutions Labs, the unit developing Soneium.

The flip side of Japan’s taut regulatory posture was evident after the global wipeout of FTX, once one of the world’s largest digital-asset exchanges. Early last year, the Japanese subsidiary of Sam Bankman-Fried’s bankrupt operation became the first to resume customer withdrawals.

“Japan is crypto friendly,” said Fernando Luis Vázquez Cao, chief executive officer at SBI Digital Asset Holdings, part of the group that operates the country’s top online brokerage. “But it’s not crypto easy.”

  - Bloomberg