How Japan Is Regulating Its Way to Asian Crypto Leadership

How Japan Is Regulating Its Way to Asian Crypto Leadership
Photo Credit: Reuters / TPG
What you need to know

Japan's path to crypto supremacy is distinguished by clear and timely regulatory intervention.

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By David Hamilton

It’s no secret that Japan is one of the frontrunners of blockchain adoption. The country has been a hot spot for crypto ever since Bitcoin first entered the market nine years ago. Recognizing this technology as a unique opportunity, Japanese crypto officials managed to transform a laregly uninformed society into one of the premier countries for blockchain adoption.

Japan’s blockchain intentions haven’t always been clear. At times there have been significant concerns raised by government officials regarding the unregulated nature of the crypto market. For example, after the Japanese exchange Mt. Gox collapsed in 2014 many Japanese citizens associated the word Bitcoin with fraud.

Today, you can buy almost anything in Japan with Bitcoin, but the country's crypto journey started much earlier. Let’s take a moment to see how Japan managed to ride the crypto wave and go from the most significant exchange hack of all time into its current position as one of the top crypto countries in the world.

The early days

Japan was one of the earliest societies to recognize Bitcoin’s potential ahead of its popularization across Asia in 2011. At thetime, a growing number of people were getting into mining Bitcoin in China, Japan and South Korea.

In Japan, many people believed Bitcoin was created by a Japanese citizen because the name Satoshi Nakamoto is Japanese. This theory helped increase Bitcoin adoption in the region.

In these early days of the crypto market, officials paid little attention to cryptocurrency. There were no cries for regulation, and despite the growing popularity of Bitcoin, most people still had no idea of its existence. All this changed once Mt. Gox collapsed.

Crypto exchanges dominate

In 2014, Japan hosted the largest Bitcoin exchange in the world: Mt. Gox. The now infamous, defunct exchange once dominated Bitcoin trading. At one point, it was estimated that Mt. Gox controlled up to 70 percent of Bitcoin’s global trading volume.

The Japanese market was preparing to undergo a blockchain upgrade, and platforms such as Bitflyer were ready to take investors to new heights. Japanese investors, recognizing Mt. Gox ’s earnings, flooded the cryptomarket and in a short period, multiple Japanese exchanges opened. Mt. Gox eventually folded due to numerous hacks but not before it had ushered in a new era of Japanese crypto exchanges.

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Photo Credit: Reuters / TPG
Mark Karpeles (C), chief executive of defunct bitcoin exchange Mt Gox, attends a news conference after a trial on charges of embezzlement in Tokyo, Japan July 11, 2017.
Japan crypto – Monacoin

Japan then began to see the entry of its first homegrown cryptocurrencies. Monacoin was Japan’s first locally developed cryptocurrency. This indigenous altcoin entered the market in December 2013 via a posting on 2channel, a Japanese textboard. The coin’s developer, Mr. Watanabe, chose to remain anonymous, and the coin’s development proceeded via an open source protocol.

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Photo Credit: Via CoinMarketCap
Crypto legislation

After 2014, Japanese officials were feeling heat from the public due to the massive amount of funds lost in the Mt. Gox fiasco (850,000 Bitcoin). In response to the growing international public outcry over the incident, the Financial Action Task Force (FATF) published the Guidance for a Risk-Based Approach to Cryptocurrencies.

The report made many suggestions to Japanese legislators, including that Japan legalize cryptocurrencies and their exchanges. This would allow the government to regulate the sector and provide some much-needed oversight to the local crypto economy.

Legalizing Bitcoin

In April 2017, acting on the advice of the FATF, Japan revised its Payment Services Act. The revision included the legalization of virtual currency as a form of payment, as well as new licensing requirements for exchanges operating in the country. Technically, Japan does not consider Bitcoin as legal tender because it is not issued by any central government, but they do acknowledge that it can be used to purchase items.

Exchanges were given six months to comply with the regulations, which included stipulations on storing customer funds, updated bookkeeping requirements, and scheduled audits. Most of these stipulations were a direct result of the Mt. Gox hack and were intended to prevent further loss of funds. The platforms were allowed to remain open during this six month period while they awaited approval from the Japanese government. Eleven exchanges had received their approval for operation by September 2017.

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Photo Credit: Reuters / TPG
Kolin Burges, a cryptocurrency investor and former software developer who lost 311 bitcoins in the collapse of the Mt. Gox bitcoin exchange, poses for a photograph in Tokyo, Japan, Nov. 4, 2017.
China gives Japanese crypto a boost

China moved to close their local exchanges late last year, leading to an exodus of crypto investors from the Chinese mainland. These blockchain investors resettled in the surrounding regions in search of friendlier shores. The majority of these scorned investors relocated to Japan.

Japanese officials recognized this exodus and began developing ways to capture these funds. The Japanese government had already legalized Bitcoin as a form of payment, and investors knew that they would be welcome in the country.

Bitcoin mining

While all of these changes were taking place, the city of Fukui quietly became a major mining hub in the region due to a combination of factors. A city subsidy now covers half of a business’ rent if they chose to occupy a vacant warehouse in the city. This subsidy is luring Bitcoin miners into the region. In addition to discounted rent, miners can receive discounted electricity. While the cost of electricity in the city is not as cheap as overseas, Fukui’s rates are considered the best in Japan. These favorable conditions have turned Fukui into the go-to mining region of the country and spurred increased interest in cryptocurrency mining operations.

Regulating ICOs

Japan’s attention appears to be turning toward Initial Coin Offerings (ICOs). In April of this year, the center for Rule-Making Strategies at Tama University issued a list of ICO regulation guidelines. These regulations include implementing Know Your Customer (KYC) laws. If passed into law, ICOs operating in Japan will have to have a clear and open fund distribution policy. Also, ICOs must maintain an open tracking system that allows investors to monitor the project’s development. These guidelines are expected to become law in the coming year.

Proposed tax revisions

The latest news out of Japan’s crypto sector involves changes to their progressive crypto tax rate. Under the current law, crypto traders can be taxed as high as 55 percent on their capital gains. Regulators are looking to move from this adjustable tax rate towards a uniform rate. Lawmaker Kenji Fujimaki initiated the debate in a June 25 Upper House Budget meeting. He suggested that cryptocurrencies not be taxed as miscellaneous income, but instead that a new crypto flat tax be instituted to spur investment.

A bright blockchain future

Japan crypto continues to be a dominant force in the blockchain space. The country’s pro-crypto stance has helped to drive blockchain-based businesses to its shores in record numbers. Now, Japan is looking to cement its position as the world’s blockchain epicenter. The country’s unique blockchain legislation is laying the groundwork for the digital economy and all eyes are on how regulations influence the growth of Japan's budding crypto industry.

Read Next: Q&A: Human Rights Foundation's Gladstein on Bitcoin Versus Authoritarianism

The News Lens has been authorized to republish this article This article was originally published at CoinCentral.com here.

TNL Editor: David Green (@DavidPeterGreen)

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