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Japan offers a new dawn to VC crypto investors

Japan is changing the rules to make it easier for crypto startups to raise capital.

The Japanese government is introducing new rules that allow venture capital funds to invest in Web3 startups issuing only crypto tokens.

Previously, domestic limited partnerships were not allowed to hold crypto assets. The amendment to the Act on Strengthening Industrial Competitiveness—a broader piece of legislation aimed at revitalizing Japan’s economy—still needs to be debated and approved but is widely expected to be passed.

Once given the green light, the rule change will significantly change the way Web3 startups raise money in Japan. Essentially it means that startups will be able to offer VC investors tokens instead of shares. While the legislation is specific to Japan, it represents a big show of confidence coming from one of the world’s largest economies.

Needless to say, the crypto industry has had a tough run, particularly in the US. In 2022, the spectacular downfall of FTX precipitated major crackdowns. Last June, we saw two of the biggest crypto exchanges, Coinbase and Binance, coming into the SEC’s crosshairs after failing to register as brokers, with the latter pleading guilty to federal anti-money laundering charges in a $4 billion resolution.

While some VCs have remained bullish on the crypto sector, most notably Andreessen Horowitz which opened a dedicated crypto office in June, startups have had a tougher time fundraising. There was a modest turnaround in VC funding activity at the end of last year, according to PitchBook’s Q4 2023 Crypto Review, but that was after six straight quarters of decline. In all, there was $9.3 billion invested globally across 1,643 rounds last year—less than a third of the $29.2 billion invested in 2022.

Nevertheless, this latest piece of Japanese legislation does offer a further glimmer of hope for the relatively cash-starved Web3 startup industry. At the same time, it adds a new layer of risk for investors who are brave enough to take crypto tokens over traditional equity. As usual, a key question will be who has to pick up the tab if these investments do sour.

Bitcoin stack with a national flag in the background

Featured image by btgbtg/Getty Images

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