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  1. JAPANESE YEN MARKET

After the 2nd World War, Japan began embracing technology, innovation and adopted an open mind towards new ideas. It gradually became a leader in technology and innovation in the late 20th century. Its area of expertise includes nuclear, electronic, robotic and it has achieved stellar results in these areas. For instance, submunitions and Sony Walkman. For emergin products, Japan became the first country in the world to accept Cryptocurrency. In April 2017, the Japanese government officially acknowledged Bitcoin as a legal form of payment [1]. Bitcoin and digital currency in Japan thus experienced a surge in growth.

In Japan, businesses are increasingly adopting bitcoin as a form of payment. Some major corporations such as the biggest camera and electronic retailer Bic Camera, luxury capsule hotel Anshin Oyado and low-cost carrier Peach Airline has already adopted Bitcoin as a payment method. At the same time, many Japanese shops and an increasing number of electronic shops had begun accepting Bitcoin. This means that Cryptocurrency is gradually moving into all aspects of life in Japan.

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Japan has gradually become one of the most active countries in the global cryptocurrency space. This is because as an island country in the Pacific Ocean, Japan’s economic growth has slowed down in recent years. However, Japanese have a relatively high savings rate and this made cryptocurrency an attractive investment. According to Coinhills, as of 10th November 2018, the market trading volume of Japanese Yen against Bitcoin accounted for 40.49%, followed by the US dollar which accounts for 30.71% while all the other French currency market account for the remaining 28.80%.

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According to the data released by the FSA in April this year, as of 31st March 2018, there were 3.5 million active cryptocurrency traders in Japan. The overall transaction of Bitcoin alone is worth US$97billion. XRP, BCH and LTC is also well-accepted in Japan.

Young people will unknowingly become connected and accept new things easily. At the same time, young Japanese is also equipped with capital to manage risks associated with investing. According to a data compiled by Global Economy , the number of Japanese holding credit card above the age of 15 is among the highest in the world. In Japan, people at the age of 20s, 30s and 40s makes up the bulk of Cryptocurrency investors. They represent 28%, 34% and 22% of the people who are trading cryptocurrency in Japan respectively . It is not difficult to understand why these young people hope to use Bitcoin and digital currency to improve their quality of life and future.

Bitcoin ATM that accepts cash and gold in Japan is also starting to evolve. At present, there are approximately 10 of such Bitcoin ATMs in Japan, with 7 of it located in Tokyo. In China, there are 3 of such ATMs in Shenzhen.

  1. THEFTS INCIDENCES

In contrast to the strict supervision of its neighbouring country China, Japan has always maintained an open attitude towards the development of cryptocurrency. However, the two highest profile cryptocurrency theft cases in history actually occurred in Japan.

Mt Gox Incident

In 2014, the Tokyo Cryptograhpic Exchange Trading Institute Mt. Gox(门门头沟)became a target of the largest bitcoin hacking. At that point in time, it was handling more than 70% of the world trading in bitcoin. This was the largest exchange for Bitcoin at that point in time. In February of 2014, the website of this exchange abruptly went down and could not be accessed. According to Mt. Gox, this was because they lost close to 850,000 bitcoins(value was approximately US $500million at that point in time). On 28th February 2014, Mt. Gox went bust. Later, Mt. Gox managed to recover approximately 200,000 bitcoins from its old wallet and to date, the 650,000 bitcoins is still missing. In June 2018, the Japanese court ruled that Mt. Gox bankruptcy is to be suspended, starting the ‘civil regeneration’ legal process, thereby allowing Mt. Gox remaining assets to be split among its clients and creditors. However, the creditors have to wait for a long time to receive their compensation because of the complexity of the legal process.

Coincheck Incident

On January 2016 in Tokyo, Coincheck Exchange was hacked and this made headline in Japan. Approximately US$530million worth of NEM was stolen, causing huge financial losses for investors. Coincheck said that the hackers spread a virus through a software into its system before stealing the private keys of the trading accounts. The cryptocurrency in this trading account were stored in the ‘hot wallet’. On 27th January, Coincheck announced that it will compensate its customers for their financial loss. At the same time, it will restore the system back to its normal operation.

  1. REGULATION

The massive theft of cryptocurrency which happened in Japan has alerted the Japanese authorities to be more vigilant against the risk of digital asset security.

In 2017, Japan became the first country in the world to impose regulations on cryptocurrency trading. On April 2017, Japan’s financial services(FSA) began to intervene in the trading of digital currency, as well as digital exchanges. The regulators explicitly requested cryptocurrency transactions to be included in the amendments to the payment services act. In order for it to be legally recognised, it has to register with the FSA. This process can last for up to 6 months and has a very strict review of network security and AML/CFT.

News of Cryptocurrency exchange being hacked was seen as a disgrace. In early 2018, news of Coincheck being hacked broke the breaking point of the FSA. . After this incident, FSA immediately issued a ‘business rectification notice’ to Coincheck. It requested Coincheck to compile a report of the theft incident and its compensation strategy before 13th February. FSA even conducted a surprise check on Coincheck on 2nd February. On top of that, it also requested all exchanges in Japan to submit a risk management report.

Subsequently, the FSA also conducted an on-site inspection on the 15 exchanges that were not being registered. It imposed penalties on 7 digital currency exchanges, including the suspension of two exchanges (Bit Station and FSHO) and the other five Stock Exchange (including Coincheck) and they were warned of potential political penalties.

The regulation of Cryptocurrency has become stricter. The FCA issued a formal warning to the currency exchanges that is operating in this area and ordered them to stop providing services. It was effective. According to the supervisory authority, the exchange violated the relevant provisions of the settlement because it does not have a legal virtual currency exchange license. The license is needed before it can offer service in that particular area. This means that the exchange would have to withdraw that particular digital currency from the market.

On 17th April, the digital currency exchange that was registered in San Francisco, USA also announced that it will suspend its service in that region and krakan does not have a legal license. In the official blog of krakan, “Krakan's field of supervision”, the issue of “withdrawal from the market” was specifically mentioned, and the language was supervised by the authorities.

“Ironically, after all the effort we put in to bringing about the VC Act in Japan, we decided to take a step back......We had been grandfathered in to operating in Japan with a VC Act application pending, however, 

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the structure of our international business, broad token selection and extreme security measures added a lot of complexity that wasn’t shared by other applicants. Additionally, because we were still under evaluation when another major Japanese exchange was hacked, the scrutiny on us intensified. It became a bit of a moving goalpost situation, also with high likelihood that we would be required to substantially reduce our token selection.”[5]

After rectification, the 16 FSE-registered 16-member exchanges in the same area unite, and today, 4 of them co-sponsored the Japan Cryptocurrency Business Association (JCBA), and submitted an application for cryptocurrency to the FSA, including investor protection. Members of the exchange within the alliance must abide to the internal insurance control and ICO guidelines. In addition, those who sought to tarnish the integrity of this industry will be punished by the use of penalties.

Woops!!!
On 19th September, the cryptocurrency zaif was hacked and money was stolen. The loss amounted to nearly $60 million and that includes the loss of 6000 special currency. This is the third time in 3 years that such an zaif main operating company Tech Bureau, Inc., has received FSA’s “business rectification” policy.

28th October: The FSA officially approves the practice of cryptocurrency industry. JCBA has been assigned to monitor the Japanese exchanges as well as imposing penalties on firms who violates its regulation. It also has the power to make provisions for the protection of consumer assets, anti-money laundering and related operational guidance. Yuri Suzuki, a partner at Atsumi & Sakai, said that the regulations of the governing body are now rigorous and she hopes that JCBA will help the industry regain public trust. [6]

  1. THE STAND ON ICO

In addition to rectifying the virtual currency exchange, the government still has its eye on the ICO market. In the second half of 2017, the global ICO market is in full swing and continues to operate without rest. Due to lack of regulations, most ICO projects are in fact scams to cheat investors of their money. The digital currency market in Asia is very big . Both China and South Korea have adopted a tougher stance to monitor ICO projects. They forbid ICO activities within their country. Compared to China, Japan adopted a different approach towards the ICO market. Japan chose to issue warnings and guidance by monitoring ICO activities within its country. 27th October 2017, FSA issues "ICOs - Risk warnings for ICOs for households and business operators": For investors, be wary of price fluctuations and potential fraud risks of ICO tokens; According to the composition of the ICO item (whether the token has a virtual currency or the characteristics of the investment product), it is determined whether the item is subject to the Payment of Services Act or the Consolidation and Exchange Act. [7]

5th April 2017, The Center for Rule-Making Strategies of Benedictine publishes a guideline on the regulation of ICOs. This government-conducted report states that ICO items should clearly state their distribution of fundraising. At the same time, the report also regulates the progress of tracking items, confirming investment status, and restricting insider exchange. [8] This report will be submitted to the FSA for policy development and may later be adopted by the law.

  1. SUMMARY

For cryptocurrencies, Japan tend to adopt a flexible regulatory policy, hoping to give appropriate guidance without impeding technology and innovation. For ICO, this still requires time to make clear regulations for this new thing, and it is also observing and listening to it. There are many changes to the Cryptocurrency market daily. Recently, topics such as STO, ETF, Custodian, and Institutional Funding have been discussed in general. For this cross-border and still rapidly changing emerging market, the government authorities also need time to make corresponding adjustments. Everyday we live in a world of trial and error. The regulation of Cryptocurrency is no exception either. The Cryptocurrency market in Japan is the most active in conducting trial and error.

References:
1)Guidance Note on the Japanese Virtual Currency Legislation and Overview on Registration Requirement thereunder, http://www.so-law.jp/wp-content/uploads/2017/07/Japanese_VC_Act_and_Registration-Overview_170704.pdf
2)How many people actually own cryptocurrency? https://daliaresearch.com/blog-cryptocurrency-ownership
3)Japan Could Have More Than 3 Million Crypto Traders, https://www.coindesk.com/3-5-million-traders-japan-releases-domestic-cryptocurrency-statistics
4)https://coinatmradar.com/countries
5)Kraken’s Position on Regulation, https://blog.kraken.com/post/1561/krakens-position-on-regulation
6)Japan grants cryptocurrency industry self-regulatory status, https://www.reuters.com/article/us-japan-cryptocurrency/japan-grants-cryptocurrency-industry-self-regulatory-status-idUSKCN1MY10W
7)Initial Coin Offerings (ICOs) - User and business operator warning about the risks of ICOs,https://www.iosco.org/library/ico-statements/Japan - FSA - User and Business Operator Warning about the Risks of ICOs.pdf
8)Call for Rule-making on ICO Proposal by ICO Business Research Group,https://www.tama.ac.jp/crs/2018_ico_en.pdf
9)How Japan Is Creating a Template for Cryptocurrency Regulation, https://www.nasdaq.com/article/how-japan-is-creating-a-template-for-cryptocurrency-regulation-cm962671
10)Japan’s Exchanges Regulatory Turning Point: How and Why Authorities Wrested Control,https://cointelegraph.com/news/japan-s-exchanges-regulatory-turning-point-how-and-why-authorities-wrested-control
11)Japan Unveils Guidelines for Allowing Initial Coin Offerings, https://www.bloomberg.com/news/articles/2018-04-05/japan-plans-first-step-toward-legalizing-initial-coin-offerings
12)仮想通貨取引についての現状報告, https://www.fsa.go.jp/news/30/singi/20180410-3.pdf