I was so wrong about the cryptocurrency regulation in Japan
Many of you in the cryptocurrency community might have already noticed that a lot of positive news is coming out of Japan, especially as of late.
This contrasts greatly with the sudden closure of cryptocurrency exchanges and the general confusion in China recently, another influential market in Asia. The trading volume of Bitcoin in Japan continues to grow and has already solidified itself as the biggest Bitcoin market. This fact, alone, keeps Japan in a unique position in this space.
I wrote a Medium post on the then-soon-to-be-enacted cryptocurrency law in Japan back in March about how I was afraid that it might have negative long-term effects that nobody talks about while positive implications were undeniable. Since then, a lot has happened in Japan, and some of my concerns and predictions have already turned out to be wrong — for better or worse. So, I will revisit this issue and illustrate where I was wrong and what that means for Japan and the rest of the cryptocurrency/blockchain industry in the world.
Overall, the regulation in Japan turned out to be much looser and has given more freedom to exchanges while the effectiveness of consumer protection is questionable. The industry is feeling more top-down, like the financial sector, now and technical development is not catching up with speculative demand at all.
Surprisingly loose definition of “approved” currencies
First, I anticipated that the selection of “officially accepted” cryptocurrencies would be strict in order to avoid potential screwups by the government, possibly acknowledging ill-intended or outright scam coins by accident.
However, it turned out this list was much looser and more broad than some people, including I, myself, predicted. Here’s an example to give you an idea of how loose the definition of official cryptocurrencies are. Pepecash received the same categorization as Bitcoin as a “first class” cryptocurrency, one that can be legally traded and sold on licensed exchanges. (Way to go Pepecash! lol)
At the same time, the decision on anonymous currencies, like Monero and Zcash, is still pending because it is harder to audit the transaction histories of these coins. However, I personally believe they will be allowed in eventually, considering the flexibility that the regulators have shown so far to exchanges.
Legal status of ICOs
Another point where I was dead wrong was the legal treatment of ICOs in Japan.
My understanding of the new law was that since it restricted which cryptocurrencies could be legally traded and sold to the public, newly created ICO tokens that were not officially approved by the regulators would not be allowed to be sold in a public token sale. However, a trick was introduced to potentially circumvent this.
If ICO tokens you are selling to the public have no stated legal responsibilities or don’t particularly promise any return or functionalities per the terms of sale, selling tokens to the public might not be violating the law as these “no purpose coins” cannot be classified as a virtual currency as per defined by the new regulation.
In essence, it’s just an extension of a donation (proof-of-donation coin so-to-speak), which might or might not turn into a legitimate approved currency in the future, which can be traded on exchanges. Buyers of ICO tokens may be able to make profits with token price appreciation or redeem them for services in the future. However, keep in mind that there cannot be a guarantee for buyers in order to avoid the conventional law.
It seems to me that there is sort of a legal blind spot for ICOs between equity offering and donation-based crowdfunding. ICO projects seem to be benefitting from this immensely right now. Even without any promises, many of them are, literally, raising millions of dollars from their token offerings.
It is also worth noting that the legal status of ICOs is far from finalized despite the common misconception about Japan, and there is a chance that enforcement will become stricter in the future if many ICO projects get exposed as busts and Japanese investors end up suffering from significant financial losses.
However, I have to admit that my prediction, that it would become nearly impossible to do ICOs in Japan after the regulation, proved to be wrong. In fact, Japan is now considered one of the most ICO-friendly jurisdictions along with Switzerland and Singapore due to the loose and ambiguous enforcement of ICOs so far.
Overseas businesses operating in Japan without being affected (so far)
Another thing I was wrong about is that foreign companies, such as Bittrex and Poloniex as well as ICO projects based outside Japan, had mostly been unaffected and remain accessible to Japanese users.This indicates that as long as users are aware and willing to take the risk of using unregulated services overseas, they are free to do so at their own risk.
However, it doesn’t necessarily mean that companies outside of Japan will be off the hook forever. The policy toward overseas companies could become stricter in the future.
For example, just recently, the Japan Blockchain Association (JBA) released a notice that specifically warned those foreign ICO projects that seem to be neglecting the regulations in Japan, that “we strongly recommend careful consideration of the Japanese regulations in soliciting Japanese residents to purchase ICO tokens in order to avoid potential punishment including a criminal penalty.”
My guess is that the current non-existent enforcement of the regulations for overseas projects will have to change eventually, especially if many of them are scammy ICOs with no substance.
What are the effects of regulations on the industry so far? What should we expect in the future?
Now that I have cleared up some points where I was wrong, how have the regulations affected the Japanese crypto market so far? What can we expect in the future?
You will likely get different answers depending on who you ask, of course.
On one hand, there are many positive effects, including more money that users and companies are flowing into the market at incredible speeds since the regulations. Exchanges, boasting the newly granted “government approved” badge of honor, are probably the biggest winners despite the hefty cost of compliance. This is because the regulations have brought in a tremendous number of new users to the cryptocurrency market, who would have otherwise been uninterested.
This trend will likely keep going strong for a while, and Japan will maintain its status as one of the most marketable and profitable cryptocurrency markets in the world.
As a matter of fact, many overseas companies have already recognized this, and a number of companies and projects are visiting Japan for conferences or special meetups, making Japan feel like a bit of a crypto hub these days.
I don’t even go to most of those events personally (most of them are not very useful in my opinion), but anyway, it’s true that lots of things are happening. It’s getting next to impossible to keep track of all those events or visitors nowadays.
On the other hand, there are some subtle yet possibly profound negative impacts I’ve been wary of personally.
First of all, even though the primary aim of the regulations was supposed to be consumer protection, I personally don’t see much improvement in this regard so far.
For example, as mentioned earlier, the enforcement of the new regulations is so lax that foreign scam ICO projects are jumping on this opportunity to prey on uninformed Japanese investors. Even if we assume that ICOs will have positive long-term effects on the economy and the space, the current ICO craze is just out of control. The “ICO friendly” jurisdiction, on the flipside, also means that the investors are at greater risk for the ICO bubble.
In short, general investors who the regulation was supposed to protect in the first place are still exposed to increasing dangers from scam ICOs to meaningless fork coins and overseas projects that are rushing to Japan to take advantage of the imbalance. This influx is making things even worse for Japanese investors. This is very concerning and frankly disgusting to me. The original philosophy of the cryptocurrency space was never about bitcoiners “legally” scamming the ill-informed, but that seems to be what’s happening today.
Another subtle influence as described in the previous article is that there aren’t many cutting edge crypto projects outside speculative trading in Japan. The regulations so far have solidified this further, in my opinion.
All the seemingly “new” and “hot” crypto ventures in Japan nowadays are either unoriginal ICO-related services (ICO review, consultation, and the like), and there are virtually no Japanese projects that are unique or potentially disruptive that have a strong presence outside the Japanese market.
Although this has always been the case, even before the regulations, the ambiguous nature of the laws makes it even more difficult to experiment with new technologies or come up with innovative business models without consulting the authorities first. All I have been hearing recently is “We have to consult with the regulators first”, or “We cannot do such and such because the authorities said so” and similar stuff along those lines.
In essence, the Japanese cryptocurrency space has begun to feel more and more like the heavily regulated financial sector, and the technology or building interesting applications seem to be a second thought to many of us now.
In my opinion, Bitcoin(and other cryptocurrencies as well) should be treated as technology first and foremost, which can disrupt the incumbent industry. Speculation is also important to bring more people in the space of course, but it shouldn’t be the only point of emphasis in the industry.
Unfortunately, people who share this view represent a small minority in Japan, and their presence seems to be fading away fast as Bitcoin as investment and speculation goes more mainstream.
In conclusion
It’s been a mixed bag of positive and negative feelings about the Japanese regulation for me, personally.
On one hand, I am excited to see mainstream adoption and more companies joining the space, creating a bigger and more vibrant industry. I am definitely one of the beneficiaries of this trend as well. (More people in the space, more profits to be made by industry insiders…)
On the other hand, innovations and real development outside speculation have not been growing the way I personally hoped for, and I’m afraid it’s a bit too early for the cryptocurrency industry to follow in the footsteps of the traditional finance sector, which is a highly regulated and top-heavy industry. Also, rampant ICO scams targeting the indecisive Japanese jurisdiction is concerning, and I predict this won’t end too well for most Japanese investors.
I might sound a bit too pessimistic, but this is the nuanced view some other Japanese insiders also share that the media cannot really pick up on.
With all that said, it’s still too early to make a final judgement on the Japanese cryptocurrency regulations. In fact, there are still a lot of undefined areas, such as the treatment of decentralized payment hubs or the status of Bitcoin forkcoins. Japanese regulators need to tackle these gray areas in the coming months, and it’ll be interesting to see how they handle all these headaches as the first nation to officially recognize cryptocurrencies. The final verdict can wait until then.
