ChainRift Research
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ChainRift Research

Japan’s “self-regulated” Cryptocurrency Industry, Bitcoin’s Vulnerability and DEXs

In recent months, there have been numerous articles on how Japan has opened the doors for what has been called a “self-regulated” cryptocurrency industry, granted by Japan’s Financial Services Agency (FSA).

The organisation in charge of overseeing virtual currencies in Japan, named Japan Virtual Currency Exchange Association (JVCEA), was formed by 16 exchanges in March and registered with the FSA since April.

The Association’s proposal to Japan’s FSA was later approved, and JVCEA was given the requested “self-regulated” status on October 24th. JVCEA is now responsible for overseeing operations, issuing minutes from meetings, and pereforming several other tasks to ensure the industry is up to par with regulations, laws and overall standards. JVCEA has also the power to sanction any exchanges that do not comply with the set out policies.

As mentioned — translated — by JVCEA:

“We aim to ensure the proper implementation of the virtual currency exchange industry and to contribute to the sound development thereof and the protection of the interests of users of the virtual currency exchange industry.”

The tasks of JVCEA include: establishment of regulations, inspections, guidance, recommendation, business consultation, handling complaints, information provision and providing statistics.

This allows JVCEA to oversee the operations of cryptocurrency exchanges while Japan’s FSA considers what laws and regulations to introduce in the future — as it can take several years. What has pushed for this change and what is the end goal?

Japan, a safe haven for Bitcoin?

Many considered Japan to be a safe haven for cryptocurrencies, in particular for Bitcoin — especially after they recognized Bitcoin to be “legal tender” early last year (2017).

The reason for this could be analysed from two different perspectives. First, the Japanese authorities wanted to open the door for Bitcoin and cryptocurrency businesses to establish themselves within the country. Second, by doing so, the authorities simplified matters, allowing them to enforce the same regulations, legal and financial requirements on Bitcoin as they do on fiat currencies.

Regardless, Bitcoin was being traded favorably within the country, contributing to more than half of the global Bitcoin trades late last year (October 2017). While neighboring countries such as China were closing the doors on cryptocurrency trading, Japan remained a strong opponent to such oppression. Unfortunately — since then — things have changed dramatically and the market has shifted in favor of the US dollar leaving the JPY to account for less than 10% of total trades. Why the huge shift?


Many associate this dramatic shift to a loss of confidence within the Japanese market brought about by people losing money through exchanges and deals — hacks and ICO’s proving themselves to be scams. This points to a lack of oversight and enforcement. So perhaps the oversight granted to JVCEA will pave the way for a better future.

“As of this writing, there are no specific rules on ICOs in Japan. ICOs have been banned outright in China and South Korea, allowed to wander in a regulatory wilderness in the United States, or kicked into the regulatory long grass in the European Union.” — John Amarri, Japan Today, 2018

Establishments of organisations such as JVCEA can safeguard investors and prevent foul play, such as the one involving Coincheck, a widely used cryptocurrency exchange based in Tokyo, which saw over $500M worth of NEM tokens being stolen from their exchange, affecting over 260,000 users.

Fortunately since then — with its own funds — CoinCheck has fully compensated all users and refunded their tokens. However due to the market price difference — at the time of compensation — the market value of the tokens was worth only $435 million.

The Financial Services Agency [FSA] had urged Tokyo-based cryptocurrency exchange Coincheck Inc. to address security concerns about the way it manages customer assets before Friday’s ¥58 billion theft of NEM tokens, it was learned Saturday. Jiji, The Japan Times, 2018

Why was CoinCheck allowed to continue its operation despite the FSA finding a vulnerability within their system? Why were they not requested to shut down their operation until this was fixed?

When the industry is unable to uphold basic standards such as keeping $500M worth of coins in a cold wallet (that is, keeping them safe offline), then of course the end result is not going to be a positive one. When we do not take into account the lessons from previous mistakes in order to prepare contingency plans — safeguarding against the possibility of future damages — then how can we move forward? Events such as that of the infamous Mt.Gox hack — another Japanese exchange — that saw close to $500M of Bitcoins being stolen due to bad management in the early parts of 2014.

Whether a “self-regulated” body composed of exchanges — some of the most widely used exchanges within the country — is a conflict of interest is something we will have to wait and see. Are there other solutions or methods by which policies are set from the bottom-up rather than top-down — so that we are not at the mercy of people who do not fully understand the technology?

Hopefully we can agree that having an organisation, which itself has a huge interest in ensuring people understand risks and are willing to stand against bad actors, can lead the way for better policies. We hope that new policies do not end up damaging the ecosystem or hinder its progress, but rather shape its path and strengthen it.

Are Cryptocurrencies Risky or Vulnerable?

Confidence is brought about by ensuring that the people who are vulnerable — who have trusted you with their hard earned money — are not put at risk by silly mistakes in operation. Would you trust a business or even a person who has not done their best to provide you with a service which can ensure your safety — whether financially or otherwise? As a man selling honey on the side of the road in Australia once told me regarding bad actors: “If you cannot be trusted, then you shouldn’t be here…”

We can argue about the overall vulnerability of Bitcoin and cryptocurrency prices — whether they are directly related to the technology or the psychology of the users — though that would be jumping to conclusions. It would be wise to take into account the responsibility of the service providers, and the effect that it has on the market. When the market is in the hands of incompetent leaders and operators, then of course it is going to be a volatile place. Whether regulation is the answer to that problem remains open for discussion, though as the quote goes:

“Explanations exist; they have existed for all time; there is always a well-known solution to every human problem — neat, plausible, and wrong”. — H. L. Mencken, New York Evening Mail, 1917

Bitcoin was designed to remove intermediaries, and most of the problems in the cryptocurrency industry have been caused by the shortfalls of third parties. The Bitcoin network itself is yet to be hacked. It has been operational since its birth in 2009. The issue has always been with those who are providing a portal for those unable to gain the knowledge required to operate without them. This is why Decentralised Exchanges (DEX’s), platforms where no central intermediary can control or manage user funds are of the utmost importance. DEXs reflect true peer-to-peer principles instead of molding a revolutionary system to legacy structures.

“To implement blockchain technology within existing centralized state boundaries and laws would limit and perhaps destroy the very thing it was designed to change.” — Amin Rafiee, 2014

Image from Pixabay




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Amin Rafiee

Amin Rafiee

Advocate of decentralization, privacy, and bottom-up strategies. Consultant and Public Speaker. Specialized in product development & innovation pathways.

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