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Japan eyes prize in regulating bitcoin

As speculative fever takes hold, cybercriminals taint the brand with ransom demands and prices whipsaw between record highs and cliff-edge stumbles, governments, investors and financial institutions are legitimately asking whether the world is ready for bitcoin.

A thornier question — soon to be answered in Japan — is whether bitcoin is ready for “Mrs Watanabe”, the notional holder of the nation’s household purse-strings.

Since April 1 this year, as the global market value of bitcoins and other cryptocurrencies has surpassed $50bn, a growing number of online exchanges, funds and remittance companies has been scrambling to make formal registrations with the Japan Financial Services Agency. The process is expensive, demanding, laced with invisible tripwires and not all applicants, by any means, will be successful.

The prize, though, could be spectacular. Japanese retail investors — a group that does include a lot of Mrs Watanabe housewives but is actually dominated by her day-trading children and their leveraged online accounts — are voracious. FX margin trading in Japan, the “Mrs Watanabe” favourite with volumes at about $10tn per quarter, is the largest in the world. A minute fraction of that channelled towards the bitcoin market, say the most excitable proponents, could be transformational.

Propelling the rush to register is new legislation that (perhaps counter-intuitively for a country whose financial services industry still routinely uses fax machines), puts Japan comfortably at the head of the global pack on crypto currency trading regulation. Some US states have their own regulation for local bitcoin exchanges, but so far, no central government has taken the plunge and attempted to regulate an asset that was invented to defy regulation. It is easy to see why the FSA is keen to move: Japan, by volume, is one of the largest centres of bitcoin trading on any given day and has been helped by China clamping down. The Japanese government — unexpectedly clear-headed on the issue — sees as much potential opportunity as threat in that.

Hence the stampede to register exchanges and other businesses with the FSA. The prospect of a market where the government has demystified an otherwise enigmatic asset and Mrs Watanabe has been soothed by seeing the stamp of a regulator known for its conservatism, is simply too lucrative a bet to pass up.

By October 1, any bitcoin or “alternative coin” exchange or money transfer business that wants to operate in Japan must come under the regulatory supervision of the FSA and be submitted to annual audits. Much of the regulation (some of it in the familiar language of anti-money laundering measures and “know-your-customer” protocols) represents an attempt by Japan to purge some of the anarchy from bitcoin’s image. Other parts are designed to ensure separation between the stashes of customers’ bitcoins from those belonging to the exchanges themselves — a measure that might have avoided some of the chaos that followed the 2014 collapse of what was at the time the world’s biggest bitcoin exchange, the Japan-based Mt Gox.

In a final regulatory flourish that gently mocks the first two-thirds of the phrase “digital crypto currency”, new customers will not be able to trade until they have received a hard-copy acknowledgment letter, delivered by registered post to their home address.

But for all the regulatory freight, this is a strangely light-footed moment for Japan and the FSA. To reach this point, a series of surprisingly un-Japanese breaches of natural conservatism have been necessary — not least, the formal recognition of bitcoins as a legal payment system.

There are several reasons for the leap. The first arises from the Mt Gox catastrophe, the high global visibility of what remains one of the biggest digital heists in history, an international cast of furious investors and the FSA’s fierce discomfort that all this happened on its turf. This is an assertion of control by Japan, but one driven by the desire to legitimise something that it knows, from long experience, that Mrs Watanabe may very well be interested in.

Just as important, though, is the extent to which fintech — a loosely-mapped Aladdin’s cave of blockchain technology, crypto currency trading, artificial intelligence data analysis and other envisaged innovation — lies at the heart of government plans to turbo-charge Japan’s comatose financial services industry. Everyone loves and talks up the idea of Japanese banks (only recently armed with the legal ability to do so) splurging investment towards bleeding-edge fintech; nobody, confides the president of one of Japan’s three megabanks, is going to invest a single yen until there is a regulatory framework in place.

The way regulation has been handled in Japan, say companies currently applying for the licence, is both curse and blessing. On the one hand, there are elements of the regulation that are heavy handed and could ultimately threaten a crypo-currency that has thrived on anonymity. Apart from bitcoin, for example, there are more than 800 alternative currencies on the market, but the FSA is effectively approving only one of them, ethereum.

“When you are talking about start-ups, which of course a lot of the bitcoin-related businesses are, you never really think of regulation as a good thing,” says Mike Kayamori, chief executive of the crypto currency exchange Quoine, who argues that Japan has a long history of using regulation to squash innovation and “undesirable” areas of industry as it famously did with consumer loan companies in the late 2000s. “But in this case, it just might be different. The retail investor — Mrs Watanabe — doesn’t want the wild, wild west, she wants something regulated and trustworthy.”