What Japan could teach the US – and the world – about regulating crypto

After the MtGox hack, Tokyo introduced tough rules that later protected FTX customers. Now, from the secure base, it goes to allow blockchain technologies to flourish.

Mover a million investors around the world were left stranded when FTX suddenly collapsed in November with a staggering hole, estimated at $8.7 billion, in its balance sheet. The cryptocurrency exchange and its 130-plus affiliates have been in bankruptcy for five months, and a new management team claims to have recovered $7.3 billion of the missing cash and tokens. Still, only a portion of the company has returned money to customers.

FTX’s Japanese unit allowed all verified accounts to resume withdrawals on February 21st. As of April 25, nearly 10,000 retail and corporate customers had withdrawn crypto and cash worth about ¥23.4 billion ($175.4 million), according to the company.

Count this as a victory for Japan’s financial regulators and the strict rules they have put in place to protect consumers in the wild and woolly world of crypto.

Japan cracked down on safety and health rules from a single regulator after two major stock market crashes. But now, from that stable (and some in the industry would say overly restrictive) base, it is trying to come up with a strategy to become a leader in the collection of mostly decentralized blockchain-based technologies known as Web 3. The US, by contrast, has arguably been open to more innovation, but its dueling regulators and lack of rules have created regulatory gaps and a culture of regulation through regulation that makes strategic planning dangerous.

Japan, an early adopter of digital assets, learned the value of regulation early and the hard way, through what remains the most infamous crypto hack ever – the 2014 heist of 800,000 bitcoins from MtGox, which had been the world’s largest bitcoin exchange. Four years later, Coincheck, another cryptocurrency exchange based in Tokyo, was robbed of $500 million of the NEM blockchain’s xem coins.

“The drama and upheaval that the US is experiencing over the Sam Bankman-Fried, FTX, Bahamas situation is not relevant in Japan,” said Sheila Warren, CEO of the Crypto Council for Innovation, a Washington, DC-based group that advocates for the industry worldwide. That’s because Japan has already been there and done that.

After the MtGox and Coincheck shocks, Japan’s primary financial regulator, the Financial Services Agency (FSA), tightened regulations on crypto exchanges, notes Ananya Kumar, deputy director of digital currencies at the Atlantic Council’s GeoEconomics Center, the think tank’s unit that addresses foreign policy, finance and economics.

The FSA’s rules include:

  • Customer and company assets must be held separately, with holdings verified in annual audits.
  • Investors cannot borrow more than twice their investments for leveraged trading on exchanges. (Many cryptocurrency exchanges, including Binance, allow trading with 100x leverage.)
  • Exchanges must keep at least 95% of client funds in cold wallets, which are not connected to the internet.

The measures proved crucial in allowing customers of the Japanese subsidiary of FTX to withdraw their assets after its parent company filed for bankruptcy in November. It is still unclear when other FTX clients will be able to get their money back and how much of it they will get.

Japan has thus become a customer-friendly crypto paradise but at the cost of strict supervision of the free-wheeling digital asset industry.

Now, Japan is building on that secure base, with a national economic strategy and an effort to lead its allies in creating regulations that will effectively govern the industry.

“The FSA contributes to international policy discussion, including that of the Financial Stability Board – an international organization that monitors and makes recommendations on the global financial system – on crypto-assets by leveraging its experience as a global forerunner in the regulation and supervision of crypto-asset activities and markets” , the agency said Forbes in written comments.

OOn April 6, the ruling Liberal Democratic Party’s web3 project group, tasked with drafting crypto-focused policy proposals, released a white paper outlines several recommendations, including a call for Tokyo to take the lead.

“After the crypto winter, Japan may be the first to welcome spring,” the 35-page document predicts. “As a country that has overcome many difficulties in the cryptocurrency industry, we are in a position to convince the world of the immeasurable potential of web3.”

Proposals in the paper include tax reforms, improved accounting standards and regulation of blockchain-based finance. There is even a recommendation for the government to push the conversation on digital assets at the next Group of Seven (G7) summit, which is scheduled to be held in Hiroshima later this month.

“While Western financial regulators seem single-mindedly focused on tightening regulations in the midst of what is being called a crypto winter, I judge that Japanese financial regulators correctly understand the potential of blockchain and other technologies and are working to design regulations in a forward-looking manner,” said Masaaki Taira , the team’s leader and member of the House of Representatives, in written comments to Forbes.

In February, Prime Minister Fumio Kishida told the Budget Committee of Japan’s House of Representatives that there are “various opportunities to use web3” in Japan. He said the Japanese government could use blockchain-based mechanisms such as non-fungible tokens and decentralized autonomous organizations to revitalize regions and promote ‘Cool Japan’ – a national strategy aimed at promoting the country’s innovations and culture to the rest of the world that dates back to the early 2000s and echoes Britain’s ‘Cool Britannia’ policy of the 1990s.

According to Taira, his team—including about 10 members of the Diet (Japan’s national legislature), six private-sector lawyers with web3 expertise, and 10 leading Japanese digital influencers acting as advisors—is working directly with Kishida and several government agencies. “The policy proposals compiled by the project group are adopted almost directly by the LDP, and a significant part is adopted in government policy. It is an extremely powerful law,” he said.

“The way they talk about crypto is very cryptonative in terms of what the technology enables and what aspects of current regulation just don’t work,” says the Crypto Council’s Warren. “They say analog regulation doesn’t work in digital environments.”

Japan does not have a long history of being hospitable to blockchain entrepreneurs. In addition to its heavy-handed regulation, Japan’s tax code is particularly hostile to the industry. It is also difficult to get new cryptocurrencies approved. After founding their gaming company Murasaki on their home shores last year, Shinnosuke Murata and Shunsuke Sasaki recently decided to move their business to the Netherlands. “Why would two Japanese entrepreneurs with extensive experience in starting businesses in their own country go halfway around the world to start a new business? Murata wrote in a Nikkei op-ed in October. “Simply because it just wasn’t possible to do it in Japan.”

With a corporate tax rate of around 30% on unrealized gains from cryptocurrency holdings, getting a new blockchain-based business off the ground is a real struggle, says Murata Forbes. “Suppose you issue 100 tokens each worth $1 million. Even if you don’t realize profits, you have to pay $30 million next year. Virtually no startup founders can issue a token,” explains Murata.

Major US crypto exchanges such as Kraken and Coinbase have recently closed their subsidiaries in Japan, cites “Market Terms”. Overall, there is 37 crypto exchanges registered in the country, according to the FSA.

Additionally, the agency can take months to review proposals to list new tokens, resulting in Japan’s trading market growing much more slowly with lower liquidity levels than other countries’, Murata said.

“Japan is losing entrepreneurs who can build $100 million companies because of these barriers,” he laments.

The existing framework makes it difficult for local entrepreneurs, agrees Roi Hirata, head of a new Japanese subsidiary of the Avalanche blockchain’s main developer company, New York-based Ava Labs. Avalanche’s brand awareness in Japan is exploding, Hirata says, prompting Ava Labs to begin building a presence in the island nation. As a first step, his team has partnered with Japanese media giant GREE on a new blockchain game.

“I see a huge opportunity for both intellectual property providers and traditional businesses in Japan to adopt a blockchain like Avalanche, which provides both decentralization and compliant service,” Hirata noted in an email to Forbes.

For now, its deep tech giants leading the blockchain puff in Japan. of the year Forbes Blockchain 50an annual list that highlights the best enterprise applications of distributed database technology, includes three Japanese companies, Fujitsu, LINE and NTT.

Social media giant LINE is helping to create NFTs for 26 major clients including SoftBank, South Korea’s search engine Naver and Visa. According to the company, more than two million wallets have been registered on its DOSI NFT platform since September. NTT Docomo, the country’s dominant mobile phone service, have promised to invest up to $4 billion in web3 infrastructure.

Electronics powerhouse Fujitsui partnered with financial services giants including Mitsubishi UFJ Mizuho and Sumitomo Mitsui to build the “Ryugukoku” or “Japanese Metaverse Economic Zone.” the initiative, notified in February, is trying to build a shared metaverse infrastructure for large enterprises.

Meanwhile, the FSA plans to lift its ban on domestic distribution of stablecoins later this year. Exact dates and which coins will be allowed have not been decided, but decisions are planned for June.

“This does not mean that all foreign-issued stablecoins will be allowed without any restrictions,” the agency said Forbes via written comments. “We will allow stablecoins to be handled after individual review, if there are no issues from a user protection point of view, etc. Examples are: foreign issuers in their countries subject to equivalent regulations as in Japan, and that underlying assets are preserved appropriately.”

Late last year, the ruling party’s tax committee approved a proposal to exempt crypto startups that issue their own tokens from paying corporate tax on unrealized profits. New proposals introduced in the white paper include tax exemptions for companies holding tokens issued by other companies that will not be traded in the short term and limiting taxable events only to cases where the assets are exchanged for traditional currencies.

“I think that’s not only really exciting, but it actually paves the way to show the rest of the world here’s how you create forward-thinking flexible regulation that can navigate back this tricky balance of preserving a lot of room for innovation while protecting consumers , says Warren.

The overall message is “Japan is back, again.”


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