Japan regulator finds Line broke rules over payment tokens: sources

TOKYO (Reuters) - Japanese regulators have ruled Line Corp [IPO-LINE.T] broke rules over the use of a type of payment tokens for an online game, making the messaging app operator liable to pay a deposit shortfall to authorities, people familiar with the matter said.

The Kanto Local Finance Bureau judged that the tokens used in the game are a "prepaid form of payment" and that Line breached Japan's fund settlement law by failing to notify authorities about money deposited for a kind of token used in one of its games, the sources said.

Line is a subsidiary of South Korea's Naver Corp. The sources declined to be named because they were not authorized to discuss the matter.

Under Japanese law, funds raised from prepaid tokens used as currencies must be reported to the authorities, with companies obliged to park half of customers' total unused deposits of over 10 million yen ($91,500) with a division of the Justice Ministry.

Line has told the regulator it will pay the deposit shortfall, the Mainichi newspaper reported, citing an unnamed source. Line had at the end of March a shortfall of unpaid deposits of around 12.5 billion yen ($114 million), the Mainichi said.

Asked about the figures and the regulator's findings, Line spokesman Icho Saito said regulators had requested it did not disclose the results of the investigation.

"We will respond in good faith to the Bureau's instructions," Saito said.

It was not immediately clear if any other action is being taken against Line. Kanto Local Finance Bureau spokesman Takamasa Kyono declined to comment on individual cases.

Online games and apps that use prepaid tokens as means of in-game payment are popular in Japan. But 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.

Line said last month regulators had raided its offices as part of a routine investigation. A source told Reuters the raid was over the handling of customers' money used to buy payment tokens. Line did not park funds from the token because it did not consider it a currency and as such not subject to reporting requirements, it said.

Naver Corp shares were down 0.6 percent in midmorning trade Wednesday versus a 0.7 drop in the benchmark index.

Line, Japan's largest messaging app with 68 million registered users, has been mulling an initial public offering. Last August it put plans on hold, but its chief said in March it is still considering an IPO.

($1 = 109.2700 yen)

(Reporting by Takahiko Wada and Yoshiyasu Shida; Writing by Thomas Wilson; Editing by Muralikumar Anantharaman)