Cryptocurrency regulations in Japan
One of the strictest countries in the world when it comes to cryptocurrency regulation is the island nation of Japan. Despite being home to some 3.5 million active cryptocurrency traders, the country’s FSA (Financial Services Agency) has been very tough on crypto exchanges.
An exchange, which is essentially a cryptocurrency trading platform, has to be registered with the FSA to operate in the country. Earlier this year, it was announced that the government finally was accepting bitcoin as a form of currency, causing a surge in the number of exchanges and users.
The move was a cautious one after a January hack that scrubbed $516 million from the Coincheck exchange. In September, the Japanese National Police Agency released a report that almost $540 million had been stolen across 158 attacks in the first half of 2018.
Even after the report came out, $60 million was stolen in another high profile hack. In November, 8 people were arrested for engaging in a Ponzi scheme that defrauded 6000 investors of another $68 million. More recently, the police agency released a report citing almost 6000 cases of cryptocurrency money laundering from January to October.
All of these incidents highlight the need for better, technology-driven controls industry-wide, as fear of falling victim to scams or hacks is a big barrier for many people to enter the market and begin crypto trading.
Japan has done more this year to help foster safe implementation of these technologies but still has a ways to go. Let’s look at the state of regulations there today.
While it has allowed grandfathered exchanges, there hasn’t been a new exchange approved by the Japanese FSA since 2017. There are currently 160 applications awaiting approval, including US-based industry giant Coinbase.
According to Coinbase, this crackdown is in their favor as one of the most trusted and established exchanges worldwide.
“Talks on obtaining a license are going well with the Japan’s Financial Services Authority,” said Mike Lempres, chief policy officer at Coinbase, in a recent interview for the Nikkei Asian Review in Tokyo. “We are … committed to getting it done. It will certainly be in 2019.”
With such a backlog of applications, and high profile players among them, all eyes are on the FSA to see which, if any, new exchanges win approval. This will be widely viewed as a barometer of how Japan will be treating cryptocurrency business in the future.
One of the requirements the FSA is placing on new exchanges is to have all of their infrastructure located in Japan. For companies as large as Coinbase, that is a challenge when they have the infrastructure elsewhere. The FSA wants to have better visibility by having operations based locally.
For a short time, Binance fled the harsh regulatory climate in South Korea to set up shop in Japan, but has since moved on to Malta as it found the climate still too stifling in Japan and was warned for operating without a license.
More recently, the JFSA made waves again by announcing their intention to regulate online cryptocurrency wallets as well as exchanges, because it is still possible to engage in crypto trading within many of the applications.
Move toward self-regulation
Back in March, a group of 16 cryptocurrency exchanges formed a group, the Japan Virtual Currency Exchange Association (JVCEA), registered with the FSA and asked permission to form a self-regulatory council.
Requirements that cryptocurrency exchanges regularly conduct audits, as well as bans on certain anonymous cryptocurrencies (like monero or dash,) were part of a 100-page draft of potential regulations released by the association in June.
They have also expressed an interest in clamping down on margin trading, by limiting borrowing to four-times an investor’s initial deposit. These proposals came on the heels of the FSA’s own investigation into practices at various cryptocurrency exchanges, leading to ‘improvement orders’ for non-compliant ones.
In October, the FSA formally granted the request by the JVCEA to form a regulatory body. In the early stages, there is promise for a self-regulatory framework to help the industry better align with government agencies and help themselves by stopping costly and damaging fraud and theft.
The JVCEA hope to reverse the damage to public and government trust created by a year’s worth of high profile hacks and scandals.
What will the future hold?
Despite the encouraging approval of the JVCEA, the recent announcement about further regulation of cryptocurrency wallets still leaves a fair bit of doubt over the future of Japanese regulations. At the very least, the group working on self-regulation will hopefully be able to educate and drive the government toward making better regulatory decisions for both the industry and investors.
It’s clear the demand is there with a vibrant cryptocurrency market thriving in Japan. Much like many other countries around the world, the regulatory agencies are grappling with that demand versus creating a secure platform for their citizens. Pressure to not be left behind the rest of the world means that it is surely a top priority for the Japanese government.