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Japan FSA 4th Study Group on Virtual Currency Exchanges

The Japan FSA’s 4th study group took place on June 15, 2018

The minutes of the 4th “Study Group on Virtual Currency Exchanges”, which took place on June 15, 2018, have been published recently. At this meeting, through video call, the participants included:

The following translates the opening comments from Joichi Ito and Gary Gensler. The whole minutes are unfortunately too long to translate completely. You can find the full Japanese text on the FSA website. In addition, Gensler’s and Sarbhai’s slides are available.

Joichi Ito

We have launched a concept called “Digital Currency Initiative” (DCI) a few years ago, which has some unique points I would like to highlight.

First, the Digital Currency Initiative is one of the most interdisciplinary groups. Among the members, Mr. Gary Gensler was the chairman of the Commodity Futures Trading Commission and Simon Johnson was once the Chief Economist of the IMF. In addition, people like core developers, bitcoin lead developers, the world’s most excellent cryptologists at MIT, engineers and researchers in key fields participate.

Second, members of DCI do not own virtual currencies and do not invest or advise on investments. So, DCI does not try to sell something.

We are striving to inform central banks, government agencies and companies about neutral and accurate ideas from economic and technical fields. We are also studying and researching the long-term perspective on blockchains.

Today I will talk about markets and exchanges of cryptographic assets in particular. Since joining DCI in January, Mr. Gary Gensler energetically conducted discussions on regulatory issues around the world and studied the regulatory environment in the United States. So, I would like Gary to explain recent ideas and discoveries.

Gary Gensler

We have talked with economists, engineers, and blockchain experts from nearly 60 countries. So I would like to talk about public policy regarding cryptographic asset exchanges and Initial Coin Offerings (ICOs).

The title of this presentation is “Crypto Finance”. As of a few days ago, the market capitalization was USD 340 billion. Because the cryptographic assets have been stolen from South Korean exchanges since then, the market capitalization has fallen to about USD 300 billion. This was similar to the Coincheck incident in Japan, but it was a smaller exchange that lost about 30 percent of its assets, and in response cryptocurrency prices fell.

USD 300 billion seems to be a big amount, but global capital markets are worth about USD 200 trillion. The stock market alone is worth USD 80 to 90 trillion, and the bond market is worth over USD 100 trillion. Compared to that, Crypto Finance is just a fraction. Capital markets as a whole are about 800 times bigger than this cryptographic financial market. However, the degree of interest of the public and regulators is much larger than 1/800th of the value.

There have been over 3,000 ICOs so far, but most of them have failed. The failure rate in the last 12 months was roughly 50% to 60%. This is because of fraud and misbehavior, and sometimes people simply failed due to bad luck. However, unfortunately, we observed many frauds.

There are currently about 200 cryptocurrency exchanges. As of March, 16 companies were registered in Japan and a further 16 companies had applications pending. However, perhaps the number of dealers who knocked on the door of the Financial Services Agency probably exceeded 100.

Different countries have varied responses to misbehavior, to promote financial stability, and protect individual investors. Basically, countermeasures against tax evasion, money laundering, provision of funds for terrorists, and deferment of economic sanctions are applied. In the United States, the State Department, Treasury Department and others are worried whether they can guarantee that cryptographic assets will not be used for actions such as escape of economic sanctions against North Korea and Iran.

Regarding financial stability, the market size is USD 300 billion, so now it seems that there is not much concern. For the moment, rather than taking some big action, monitoring is appropriate, but concerns about financial stability are lingering.

The third is protection of general investors. I think there are two types, “investor protection” and “customer protection”. Many countries are trying to protect consumers’ cryptographic assets from hacking, major losses, theft, etc. However, the degree of “investor protection” required varies from region to region. “Investor protection” in developed countries, in addition to “customer protection”, was developed over the last 70 to 100 years. It regulates fund raising issuers (stock etc.), promotion of economic growth, protection of investors. However, there are large differences depending on the area. I think that the United States and Canada are trying very much to protect investors in this crypto asset field. But even in the USA and Canada, there is a balance between innovation and investor protection. In the United States, the Securities and Exchange Commission (SEC) has announced that Ether is not regulated as a security.

I will explain a bit more about the market of cryptographic assets. It is a market with considerable volatility. Roughly 40% of the total market capitalization is Bitcoin.

Next, I will talk about ICOs. I worked at Goldman Sachs for 18 years as an investment banker, not as regulator or former regulator, and Professor Ito was also on of the most successful entrepreneurs in the world and a venture capitalist, so I will talk about ICOs from the perspective of an investor. To us the ICO looks like an investment scheme. It is a combination of investment and consumption. Purchasers of tokens expect profits from rising valuations. Developers will build networks using their purchases. I think that these are classic investment contracts. The buyer hands the money to the developer, the developer actually creates something and the purchaser gains profit from the price rise.

We are holding cryptographic assets because we are expecting profits from rising prices. Let’s take a look at Ripple. At first Ripple owned 80% of token · XRP by themselves. By now Ripple holds only 61%. An entrepreneur may own only 10 to 20 percent, but whether it is 10 percent or 80 percent, the entrepreneur is trying to gain a profit by holding a token anyway. This itself is a good mechanism. The problem is that such a mechanism should be placed under the Investor Protection Act. Most ICOs are outside of these laws, but it is said that approximately 25 percent are ICOs are fraudulent, and according to a Wall Street Journal survey 81 percent of ICOs are said to be illegal.

About 24 billion dollars have been raised through ICOs across Europe, North America, and Asia. Recently, Venezuela has announced that it raised USD 5 billion in funding, with a cryptocurrency called “Petro”. I believe that many people actually cannot raise such large amounts of money, but EOS actually raised USD 4 billion. In addition, there are at least 100 entrepreneurs / ventures raising more than USD 50 million each. It is beginning to be a big number.

In 2017, venture capital raised USD 160 billion worldwide, so the ICO market is not of the same size yet. Nonetheless, in 2018, ICO’s procurement amount is projected to be between USD 20 billion and USD 30 billion, while the venture capital’s procurement amount is still about USD 150 billion (the difference is getting smaller and smaller). Entrepreneurs’ fundraising methods are starting to change dramatically in many industries.

If Professor Ito was 23 years old and is just starting his Internet service provider’s business, would he want to raise funds through an ICO?

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Norbert Gehrke

Norbert Gehrke


Passionate about strategy & innovation across Asia. At home in Japan. Connector of people & ideas.