What is the cryptocurrency future in Japan?

Any serious discussion of cryptocurrency will eventually need to address Japan. The land of the rising sun is home to a massive base of cryptocurrency investors and users. On a given day (in 2018), Japan is either the second or third-largest economy in the world for Bitcoin. Japanese yen average 11% of global trading volume for BTC, keeping it neck-and-neck with the South Korean won for global trading dominance after the U.S. dollar. For a country of only 127 million people, 11% of global trading volume is an outsized influence per capita on the crypto industry.

Furthermore, Japan is leading the world in cryptocurrency acceptance, regulation, and even legalization. Japan’s major cryptocurrency exchanges are registered as financial services institutions, and Japanese regulators are among the most forward-thinking government officials in the world. As we’ll see in this article, the acceptance and enthusiasm for cryptocurrency have led to a booming crypto industry in Japan, characterized by typical Japanese techno-optimism.

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As of March 2018, the country had over 3.5 million individuals actively using and trading cryptocurrencies. The popularity of cryptocurrency in Japan has led to some of the best laws about crypto in the world. Japan is the first and only country to recognize cryptocurrency within the legal system and provide a legitimate way for its citizens to engage with crypto.

Japan’s status as a leader in crypto and blockchain is a story of culture, luck, and determination. In this article, we’ll look in-depth at the history of technology, money, and cryptocurrency in Japan to gain insights into what’s driving the Japanese crypto craze and what we can expect in the future.

1. Crypto Regulations in Japan

Despite its continued history of hacks, cryptocurrency is still popular in Japan and regulators have not blocked it outright. Far from it, actually. Since 2016, Japan has officially recognized crypto as a type of money for making payments. A bill introduced in the Japanese parliament in March 2016 broadly addressed financial technologies, and specifically named virtual currency as part of this growing field. The law was approved and went into effect shortly thereafter.

This official recognition brought cryptocurrencies under the purview of the Financial Services Agency in Japan. This agency regulates all banking and investment in the country. The FSA both legitimizes cryptocurrency and puts standards in place for operating a cryptocurrency exchange.

Sixteen of those government-approved cryptocurrency exchanges have formed their own self-regulatory body, as well. The Japan Virtual Currency Exchange Association is a collective of exchanges operating in the country who agree to follow certain rules and best practices while operating in Japan. The goal is to make cryptocurrency safer and more legitimate for Japanese consumers while creating a single point of contact between government regulators and exchange operators.

After the recent Coincheck hack, for instance, the Association was quick to implement its own new rules and regulations in response. The new rules set a maximum cap on the percentage of user funds that can stay in hot exchange wallets. Anything over the threshold of 20% would need to automatically and autonomously move to cold storage for security purposes. Via this self-regulating body, exchanges can make rules that work for them while still keeping government regulators satisfied.

2. Deep Roots in Tech

Going back decades, Japan has been on the leading edge of technology development. Japanese engineers were the first to create the pocket calculator, the Walkman, and LED lights. Japanese research has brought the world major breakthroughs in robotics, high-speed rail, and portable devices.

Many of the major consumer tech companies in the world come from Japan. Canon, Hitachi, JVC, Nikon, Nintendo, Panasonic, and Sony are all Japanese companies. In addition, Tokyo, Japan’s capital, has long held the connotation of being a high-tech, high-density society of the future, complete with robots in the street, automated restaurants and hotels, towering skyscrapers, bullet trains, and six-story electronics stores.

Culturally, all this innovation has predisposed Japanese citizens to be accepting of and even anxious for technological disruptions. Japanese consumers are obsessed with novelty and willing to try new things, especially when it comes to technology. So, it’s not surprising that cryptocurrency has found such a foothold in the country. Cryptocurrencies–Bitcoin most prominently–promised Japanese users a new means of transacting.

3. Crypto’s Rising Sun

Japan’s ties to cryptocurrency go all the way back to the very beginning. Whoever first developed the idea for Bitcoin decided to use a Japanese name as their pseudonym. Satoshi Nakamoto will forever link Bitcoin to Japan and places a stake in the ground, around which all other aspects of cryptocurrency in Japan grew.

From very early on, Japan has been a crypto hub. Japanese citizens were among the first to start mining and using Bitcoin, even at the beginning when it had very little real-world value. Mt. Gox, the world’s biggest crypto exchange at the time, was a Japanese company. Millions of Bitcoin transactions flowed through Japan.

Some of the world’s biggest crypto celebrities lived in Japan. Roger Ver proselytized Bitcoin heavily in Tokyo and around the country during the first few years of Bitcoin’s existence, even giving away free Bitcoins so people could play with them and learn how to use them. Ver was the one who convinced Mark Karpeles to purchase Mt. Gox from programmer Jed McCaleb in 2011 and operate it as a Japanese corporation.

4. A History of Hacks

Of course, things did not end well for Mark Karpeles and Mt. Gox. In what would become a turning point for Bitcoin and cryptocurrency generally, Mt. Gox suffered a massive hack in February 2014. Hackers stole $460 million worth of Bitcoin at the time. That same amount would be worth over $3 billion today. The attack devastated the Bitcoin community, as it affected the largest exchange in the world and led to many users losing their funds. In total, 6% of the world’s Bitcoin supply went missing.

Mt. Gox is the worst hack of a cryptocurrency exchange ever. It was a huge setback for the cryptocurrency community who had staked so much of its reputation on the security and immutability of blockchain-backed cash. The problem, however, was Mt. Gox’s security was not up to the task of keeping attackers out. As a result, the attackers gained access to the private keys of millions of hot wallets on the exchange. They also gained access to many of Mt. Gox’s own funds.

The Mt. Gox team tried to recover the funds but was unsuccessful. After the loss of so many company funds, the exchange became insolvent. Within a few weeks, the largest crypto exchange in the world had become insolvent. Mt. Gox filed for bankruptcy, Karpeles went to jail for falsifying records during the ordeal, and trust in cryptocurrency fell to an all-time low.

Japanese investors were stunned, especially those who used Mt. Gox as their primary exchange. It would have been reasonable to expect the Japanese government to shut down other exchanges and tighten regulations to protect consumers. However, that’s not what they did. A lot of credit should go to Japanese regulators during this period. They didn’t let Mt. Gox’s mistakes cripple the overall cryptocurrency community in Japan. Instead, they imposed common-sense measures to formalize and monitor cryptocurrency investments in order to protect consumers.

5. Privacy Coin Ban

For a long time, the FSA has been concerned over organized crime and other criminals using digital currencies to launder money, especially privacy coins. That’s one of the primary reasons the Payment Services Act requires all cryptocurrency exchanges in Japan to now be duly licensed with the FSA before they can do business. The FSA wants to track know your customer data and impose anti-money laundering measures.

Several organized crime groups used Monero, ZCash, and Dash to launder money earlier this year, even with AML policies in place at Japanese exchanges. As a result, the FSA announced on June 18 that there would be an outright ban on privacy coin trading in the country moving forward. In the wake of this new ruling, Japanese exchanges have pulled Monero, Dask, Reputation, and ZCash from their trading platforms. Even though Dash and ZCash offer optional privacy that only a minority of users utilize, Japanese regulators, have still insisted on removing the coins.

The ban has many crypto enthusiasts in Japan and around the world pointing out that privacy has been made a scapegoat for other people’s bad actions. As we’ve seen with debates over government surveillance over the past few years, the trend with Japan outright banning privacy is troubling because privacy is an important right in a modern democracy. That said, money laundering is a legitimate concern, and exchanges need to come up with a way to prove that their users have gotten the funds they’re investing in by legal means.