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Cryptocurrency in Japan: A Brief History
Any serious discussion of cryptocurrency will eventually need to address Japan. The land of the rising sun is home to a massive base of cryptocurrency investors and users. On a given day (in 2018), Japan is either the second or third largest economy in the world for Bitcoin. Japanese yen averages 11% of global trading volume for BTC, keeping it neck-and-neck with the South Korean won for global trading dominance after the U.S. dollar. For a country of only 127 million people, 11% of global trading volume is an outsized influence per capita on the crypto industry.
Furthermore, Japan is leading the world in cryptocurrency acceptance, regulation, and even legalization. Japan’s major cryptocurrency exchanges are registered as financial services institutions, and Japanese regulators are among the most forward-thinking government officials in the world. As we’ll see in this article, the acceptance and enthusiasm for cryptocurrency has led to a booming crypto industry in Japan, characterized by typical Japanese techno-optimism.
As of March 2018, the country had over 3.5 million individuals actively using and trading cryptocurrencies. The popularity of cryptocurrency in Japan has led to some of the best laws about crypto in the world. Japan is the first and only country to recognize cryptocurrency within the legal system and provide a legitimate way for its citizens to engage with crypto.
Japan’s status as a leader in crypto and blockchain is a story of culture, luck, and determination. In this article, we’ll look in-depth at the history of technology, money, and cryptocurrency in Japan to gain insights into what’s driving the Japanese crypto craze and what we can expect in the future.
Going back decades, Japan has been on the leading edge of technology development. Japanese engineers were the first to create the pocket calculator, the Walkman, and LED lights. Japanese research has brought the world major breakthroughs in robotics, high speed rail, and portable devices.
Many of the major consumer tech companies in the world come from Japan. Canon, Hitachi, JVC, Nikon, Nintendo, Panasonic, and Sony are all Japanese companies. In addition, Tokyo, Japan’s capital, has long held the connotation of being a high-tech, high-density society of the future, complete with robots in the street, automated restaurants and hotels, towering skyscrapers, bullet trains, and six-storey electronics stores.
Culturally, all this innovation has predisposed Japanese citizens to be accepting of and even anxious for technological disruptions. Japanese consumers are obsessed with novelty and willing to try new things, especially when it comes to technology. So, it’s not surprising that cryptocurrency has found such a foothold in the country. Cryptocurrencies–Bitcoin most prominently–promised Japanese users a new means of transacting.
More importantly, though, Japanese consumers were able to see and predict the implications of digital currency well in advance of everyone else. Because they spend so much time on the edge of technology, they can see the consequences of a new technology much more readily than more conservative consumers around the world.
Another important implication of Japan’s history as a technology leader is governmental support for technology. Many government leaders have worked at or done business with Japan’s major tech companies throughout their careers. They understand the role technology plays in Japan’s economy and have a strong incentive to support new innovations. As we’ll see, governmental support has played a big role in the history of cryptocurrency in Japan. Without government support and oversight, the Japanese crypto economy as we know it wouldn’t exist.
2. Crypto’s Rising Sun
Japan’s ties to cryptocurrency go all the way back to the very beginning. Whoever first developed the idea for Bitcoin decided to use a Japanese name as their pseudonym. Satoshi Nakamoto will forever link Bitcoin to Japan and places a stake in the ground, around which all other aspects of cryptocurrency in Japan grew.
From very early on, Japan has been a crypto hub. Japanese citizens were among the first to start mining and using Bitcoin, even at the beginning when it had very little real world value. Mt. Gox, the world’s biggest crypto exchange at the time, was a Japanese company. Millions of Bitcoin transactions flowed through Japan.
Some of the world’s biggest crypto celebrities lived in Japan. Roger Ver proselytized Bitcoin heavily in Tokyo and around the country during the first few years of Bitcoin’s existence, even giving away free Bitcoins so people could play with them and learn how to use them. Ver was the one who convinced Mark Karpeles to purchase Mt. Gox from programmer Jed McCaleb in 2011 and operate it as a Japanese corporation.
3. A History of Hacks
Of course, things did not end well for Mark Karpeles and Mt. Gox. In what would become a turning point for Bitcoin and cryptocurrency generally, Mt. Gox suffered a massive hack in February 2014. Hackers stole $460 million worth of Bitcoin at the time. That same amount would be worth over $3 billion today. The attack devastated the Bitcoin community, as it affected the largest exchange in the world and led to many users losing their funds. In total, 6% of the world’s Bitcoin supply went missing.
Mt. Gox is the worst hack of a cryptocurrency exchange ever. It was a huge setback for the cryptocurrency community who had staked so much of its reputation on the security and immutability of blockchain-backed cash. The problem, however, was Mt. Gox’s security was not up to the task of keeping attackers out. As a result, the attackers gained access to the private keys of millions of hot wallets on the exchange. They also gained access to many of Mt. Gox’s own funds.
The Mt. Gox team tried to recover the funds but was unsuccessful. After the loss of so many company funds, the exchange became insolvent. Within a few weeks, the largest crypto exchange in the world had become insolvent. Mt. Gox filed for bankruptcy, Karpeles went to jail for falsifying records during the ordeal, and trust in cryptocurrency fell to an all-time low.
Japanese investors were stunned, especially those who used Mt. Gox as their primary exchange. It would have been reasonable to expect the Japanese government to shut down other exchanges and tighten regulations to protect consumers. However, that’s not what they did. A lot of credit should go to Japanese regulators during this period. They didn’t let Mt. Gox’s mistakes cripple the overall cryptocurrency community in Japan. Instead, they imposed common sense measures to formalize and monitor cryptocurrency investments in order to protect consumers.
Of course, that hasn’t stopped all cyber attacks in Japan. In fact, Japanese cryptocurrency companies have been particularly hard hit by cyber attacks even after Mt Gox. In 2018 alone, exchanges in Japan have lost over $600 million in user funds. Japan’s National Police Agency has investigated cyberattacks on crypto wallets and platforms in the country. They found that in the first six months of 2018 alone, there had been 158 cyber-breaches for a total of $540 million lost.
The largest portion of that sum comes from January’s breach of Coincheck to the tune of $517 million, making it one of the worst attacks ever. September 2018 saw another major breach, this time at a crypto exchange called Zaif, of nearly $60 million. Needless to say, Japanese companies have major work to do to better secure customer information and funds. Development practices should be more transparent and testing needs to be more rigorous before new updates reach production.
4. Crypto Regulations in Japan
Despite its continued history of hacks, cryptocurrency is still popular in Japan and regulators have not blocked it outright. Far from it, actually. Since 2016, Japan has officially recognized crypto as a type of money for making payments. A bill introduced in Japanese parliament in March 2016 broadly addressed financial technologies, and specifically named virtual currency as part of this growing field. The law was approved and went into effect shortly thereafter.
This official recognition brought cryptocurrencies under the purview of the Financial Services Agency in Japan. This agency regulates all banking and investment in the country. The FSA both legitimizes cryptocurrency and puts standards in place for operating a cryptocurrency exchange.
Sixteen of those government-approved cryptocurrency exchanges have formed their own self-regulatory body, as well. The Japan Virtual Currency Exchange Association is a collective of exchanges operating in the country who agree to follow certain rules and best practices while operating in Japan. The goal is to make cryptocurrency safer and more legitimate for Japanese consumers while creating a single point of contact between government regulators and exchange operators.
After the recent Coincheck hack, for instance, the Association was quick to implement its own new rules and regulations in response. The new rules set a maximum cap on percentage of user funds that can stay in hot exchange wallets. Anything over the threshold of 20% would need to automatically and autonomously move to cold storage for security purposes. Via this self-regulating body, exchanges can make rules that work for them while still keeping government regulators satisfied.
5. Privacy Coin Ban
For a long time, the FSA has been concerned over organized crime and other criminals using digital currencies to launder money, especially privacy coins. That’s one of the primary reasons the Payment Services Act requires all cryptocurrency exchanges in Japan to now be duly licensed with the FSA before they can do business. The FSA wants to track know your customer data and impose anti-money laundering measures.
Several organized crime groups used Monero, ZCash, and Dash to launder money earlier this year, even with AML policies in place at Japanese exchanges. As a result, the FSA announced on June 18 that there would be an outright ban on privacy coin trading in the country moving forward. In the wake of this new ruling, Japanese exchanges have pulled Monero, Dask, Reputation, and ZCash from their trading platforms. Even though Dash and ZCash offer optional privacy that only a minority of user utilize, Japanese regulators have still insisted on removing the coins.
The ban has many crypto enthusiasts in Japan and around the world pointing out that privacy has been made a scapegoat for other people’s bad actions. As we’ve seen with debates over government surveillance over the past few years, the trend with Japan outright banning privacy is troubling because privacy is an important right in a modern democracy. That said, money laundering is a legitimate concern, and exchanges need to come up with a way to prove that their users have gotten the funds they’re investing by legal means.
Today, Japan has 3.5 million citizens trading cryptocurrencies. Most of those users are young. Among Men aged 25-30, 14 percent own cryptocurrencies. This is a high adoption rate for any country and it places Japan at the forefront of cryptocurrency adoption worldwide. Only South Korea can compare in adoption per capita.
Companies throughout Japan are starting to accept cryptocurrencies as well. Bic Camera, a major electronics retailer now accepts Bitcoin in all its locations nationwide with help from Japanese exchange bitFlyer. If you get your electricity from E-net Systems Co, you can pay electricity bills in Bitcoin as well. It’s also possible to get a drink with Bitcoin at many bars in Tokyo’s Shibuya neighborhood. In a major move, Japanese banks are starting to use blockchain technology as well.
MoneyTap, a system that Ripple helped launch, is helping banks offer real-time fiat money transfers via a mobile app. Japanese crypto companies are also expanding their reach. bitFlyer, for instance, a Japanese exchange, has begun operations in the United States and is expanding aggressively.
All these examples point to greater acceptance of cryptocurrency across Japan. Even during the 2018 bear market, Japan remains among the top three Bitcoin using countries in the world.
7. Japan’s Crypto Future
Japan has played a pivotal role in the history of cryptocurrency to date. There’s no reason to believe its role will diminish in the future, either. Interest in cryptocurrency remains strong in Japan, and the country wields outsized power per capita in the cryptocurrency markets.
Recent hacks of Japanese exchanges are troubling. So, too, is Japanese regulators’ position on privacy coins. However, Japan still remains the most advanced country in the world in terms of cryptocurrency regulation and governmental support. As Japan continues to play a leading role in how to govern crypto well, expect more countries to follow Japan’s lead toward normalizing digital money.