Japan to Allow Crypto Investments for Venture Capital Funds

The Japanese government has announced plans to revise the laws governing limited partnership funds (LPS) to enable them to invest in cryptoassets. This move could open up new opportunities for Web3 startups and venture capital firms in the country.

What are LPS and why are they important?

LPS are funds that invest in unlisted companies and startups, usually in exchange for equity or profit-sharing. They are governed by the Limited Partnership Act of 1998, which specifies the types of assets that LPS can acquire and hold. LPS are a popular form of financing for innovative businesses, especially in the fields of technology, biotechnology, and renewable energy.

However, until now, LPS were not allowed to hold cryptoassets, such as bitcoin, ether, or security tokens. This meant that Web3 startups, which often issue their own cryptoassets as a way of raising funds and incentivizing users, could not receive investments from LPS. As a result, many Web3 projects had to seek funding from overseas venture capital firms, which posed a major barrier to entry and growth.

How will the new rules change the situation?

The Japanese Ministry of Economy, Trade, and Industry (METI) has proposed to add cryptoassets to the list of assets that LPS can acquire and hold, according to an official release and a report by CoinPost. The cabinet has approved the proposal and plans to submit a bill to the parliament sometime this year.

If the bill is passed, LPS will be able to invest in Web3 companies and hold their cryptoassets, as well as security tokens. This could potentially revolutionize the way Web3 firms raise funding in Japan, as they will be able to offer LPS investors cryptoassets instead of or in addition to shares in their companies. This could also attract more venture capital firms to invest in the Web3 sector, as they will have more options and flexibility to diversify their portfolios.

What are the benefits and challenges of crypto investments for LPS?

The new rules could bring several benefits for both Web3 startups and LPS investors, such as:

• More access to capital: Web3 startups will have more sources of funding available, as they will be able to tap into the domestic LPS market, which is estimated to be worth over 10 trillion yen ($90 billion). LPS investors will also have more opportunities to invest in promising Web3 projects, which could offer high returns and innovation potential.
• More alignment of interests: Web3 startups and LPS investors will have more alignment of interests, as they will both benefit from the growth and success of the cryptoassets they hold. LPS investors will also have more incentives to support and mentor the Web3 startups they invest in, as they will have a stake in their development and governance.
• More innovation and competition: The new rules could foster more innovation and competition in the Web3 sector, as more startups will be able to launch and scale their projects with the help of LPS funding. This could also create more value and utility for the cryptoassets they issue, as they will have more users and adoption.

However, there are also some challenges and risks involved in crypto investments for LPS, such as:

• More volatility and uncertainty: Cryptoassets are known for their high volatility and unpredictability, as they are influenced by various factors, such as market sentiment, regulation, technology, and security. LPS investors will have to cope with more fluctuations and uncertainty in the value and performance of their cryptoassets, which could affect their returns and liquidity.
• More regulation and compliance: Cryptoassets are subject to different and evolving regulations and laws in different jurisdictions, which could pose legal and operational challenges for LPS investors. LPS investors will have to comply with the relevant rules and standards for cryptoassets, such as taxation, reporting, auditing, and anti-money laundering. They will also have to monitor and adapt to the changing regulatory environment and its impact on their cryptoassets and Web3 startups.
• More education and awareness: Cryptoassets and Web3 are still relatively new and complex concepts for many people, especially in the traditional finance and investment sectors. LPS investors will have to educate themselves and their stakeholders about the nature, benefits, and risks of cryptoassets and Web3, as well as the best practices and strategies for investing in them. They will also have to raise awareness and trust among their potential partners and clients about the value and legitimacy of cryptoassets and Web3.

What are some examples of Web3 startups and LPS in Japan?

There are already some examples of Web3 startups and LPS in Japan that could benefit from the new rules, such as:

• Thirdverse: Thirdverse is a Web3 gaming company that develops and operates immersive and social virtual reality games, such as Sword Reverie and CryptoDozer. It has raised over $20 million from LPS investors, such as gumi Cryptos, DMM.com, and JAFCO. It also issues its own cryptoasset, called Thirdverse Token (TVT), which is used to reward and incentivize users and developers on its platform.
• Astar Network: Astar Network is a Web3 platform that enables developers to build and deploy decentralized applications (dApps) on the Polkadot ecosystem. It has raised over $10 million from LPS investors, such as Binance Labs, HashKey, and KR1. It also issues its own cryptoasset, called Astar Token (ASTA), which is used to secure and govern its network and ecosystem.
• Oasis Protocol: Oasis Protocol is a Web3 platform that enables the creation and use of privacy-preserving and scalable dApps, especially in the fields of data and finance. It has raised over $50 million from LPS investors, such as a16z, Accel, and Binance Labs. It also issues its own cryptoasset, called Oasis Token (ROSE), which is used to stake and validate transactions on its network and ecosystem.

The Japanese government’s plan to relax the VC crypto investment rules could have a significant impact on the Web3 sector and the LPS market in the country. It could create more opportunities and benefits for Web3 startups and LPS investors, as well as more challenges and risks. It could also foster more innovation and competition in the Web3 space, as well as more education and awareness among the public and the traditional finance and investment sectors.