Japan regulators raid messaging app Line over use of payment tokens

TOKYO - Japanese financial regulators have raided the offices of messaging app operator Line Corp , the company said on Wednesday, over what a person familiar with the matter said was the use of tokens in one of its online games.

Line, a subsidiary of South Korea's Naver Corp, said in a statement on its website that it was under investigation as part of a routine check on issuers of prepaid means of payment, such as tokens used in smartphone games.

The Kanto Local Finance Bureau was investigating whether Line had violated Japan's fund settlement law over the handling of customers' money used to buy game tokens, said the person with knowledge of the raid, who declined to be identified due to the sensitivity of the matter.

The investigation is at an early stage, the person said. If found in violation, the company will be given time to comply, after which penalties such as a business suspension order or improvement order were possible, the person said.

Online games and apps that use prepaid tokens as means of in-game payment are popular in Japan. Funds raised from prepaid tokens used as currencies must be reported, and companies are obliged to park half of customers' total unused deposits of over US$90,620 (S$122,850) with the Legal Affairs Bureau.

A Line spokesman said it did not park any funds from a kind of token bought for its 'Key to the Treasure Box' game because it did not consider that particular token to be a currency, and as such not subject to reporting requirements.

Line does report funds from other kinds of tokens within the same game, the spokesman said.

Naver could not be immediately reached for comment. Shares in the parent closed down 0.5 per cent in early afternoon trade versus a 0.4 per cent rise in the benchmark index.

The news comes as Line, Japan's largest messaging app with 68 million registered users, eyes an initial public offering.

The company put plans for a listing on hold in August, saying it would wait until its earnings and market conditions improve. Chief Executive Takeshi Idezawa last month said a listing was still an option.

Japanese regulators and companies have struggled with how to define and handle virtual currencies after the high-profile collapse of the Mt. Gox bitcoin exchange in 2014, when hackers stole an estimated US$650 million worth of the digital currency.

But new rules on virtual currencies currently passing through parliament are set to make Japan one of the first countries to regulate currencies such as bitcoin at a national level, a moved welcomed by so-called fintech-related investors and companies.