By 2014, Bitcoin was just about ready to hit the mainstream in Japan. Mt. Gox was a Tokyo based bitcoin exchange which boasted 70% of the global turnover of Bitcoin trading. However, in February of 2014 Mt. Gox suddenly closed its website and shut down its exchange when it was discovered that it had been hacked. Approximately 850,000 bitcoins worth about $450 million at the time was missing and presumed to be stolen. The CEO Mark Karpeles was eventually arrested in Japan and charged with fraud and embezzlement, and the saga was widely broadcast throughout Japan. The true nature of the incident is still a mystery and due to the widely publicized saga, the word “Bitcoin” in Japan continued to have a strong association with fraud, theft, and ponzi schemes for many years to come.
Moving past Mt. Gox
Right around the same time, however, there were some new developments in Japan. Bitflyer was a bitcoin exchange that was started by a group led by an ex-Goldman Sachs trader. QUOINE was another Singapore based company that opened an exchange in Japan. As these exchanges slowly gained a quiet following, some homegrown Japanese cryptocurrencies also emerged. One of them is Monacoin, a popular virtual currency among online gamers that can also be used to buy goods online. Currently Monacoin is ranked the world's 35th largest crypto currency in terms of market cap.
First mover advantage
2017 was a watershed year for “virtual currencies,” as the Japanese by now liked to call them. Early in the year China and Korea had cracked down on cryptocurrency exchanges and shut them down. All cryptocurrency related funding activities, called ICOs (initial coin offerings) were also prohibited. It was precisely these events, combined with a very important law amendment, that led to the explosive growth of crypto trading in Japan. On April 1st of this year, the Payment Services Act (which is a part of the Banking Act) was amended to allow “virtual currencies” as a legal form of payment.
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The combination of the official stamp of approval from the Japanese government and restrictive policies in neighboring countries helped catapult the price of Bitcoin to $7000. In addition, as of today turnover of the digital currency that originates in Japan can be as high as 60% of global Bitcoin volumes on some days.
Another milestone was when the financial regulators of Japan, the FSA, approved the operation of 11 cryptocurrency exchanges officially in September. At the same time 17 cryptocurrencies were approved to be traded on these exchanges, including the major ones such as Bitcoin, Ether, Ripple, Litecoin, and Monacoin.
ICOs propel crypto prices
With the exponential increase in Bitcoin prices this year, the rate of ICOs also ramped up. ICOs are a form of fundraising activity where the new company issues new “coins” in the form of a new cryptocurrency in exchange for a payment in Ether or Bitcoin. Compared to IPOs, these are extremely easy to do and this year alone we have seen $3 billion raised already. This is a huge increase from just a few hundred million dollars last year.
Interpretation of financial securities
The contentious issue is whether a jurisdiction considers these ICOs as financial securities being issued. The approach varies depending on the country. If the coin was used as a token only to transact goods, for example, they would be considered to be a “virtual currency”. If, however, there were some profit sharing schemes like dividends, then they would be considered to be financial instruments as they resemble equity. In the case of Japan, there are no clear regulations in place. The rules are still grey.
Drawing the line
A token that “looks and smells” like a financial security that is sold in an ICO would be considered a “collective funding scheme,” thereby falling under the FSA’s Financial Instruments Exchange Act. The catch is, if the payment is not paid in fiat currency (for example in Ether or Bitcoin), the rule does not apply. At this time, the FSA is said to be working closely with the blockchain industry in Japan to make sure the proper framework is put in place quickly, so as to prevent problematic ICOs and ensure healthy growth of this new funding scheme.
Tokyo may have lost its status as Asia’s financial hub, but it appears regulatory framework is being built so as to not lose its place in the cryptocurrency space. We hope this trend will continue, and Japan regains its stature as a leader in technological and financial innovation.
