Japan’s cryptocurrency industry faces stricter regulations following the collapse of major exchange FTX and this signals bad news for the digital currency growth in the country. The FTX incident has reignited a debate about the appropriate level of regulation for the sector in Japan.
In 2018, the hack of crypto exchange Coincheck resulted in the theft of around JPY 58 billion worth of digital tokens, leading to calls for stricter regulations and prompting the country’s financial watchdog to crack down on domestic exchanges.
Before the Coincheck hack, Japan was seen as a leading nation in the cryptocurrency world, having established regulations ahead of other major nations and having high exchange volumes for Bitcoin. However, the tightened rules had a negative impact on the sector, with many exchanges struggling to meet regulatory standards.
Tightening of Crypto
Now, after a difficult year for the wider cryptocurrency industry, some Japanese lawmakers are pushing for greater adoption of the virtual economy, believing that Web3 businesses underpinned by cryptocurrency technology could be a key driver of growth.
Japan has a history of cryptocurrency-related problems, with Mt. Gox, once the world’s largest crypto exchange, losing bitcoin worth around JPY 48 billion in 2014. In response, Japan introduced legal revisions in 2017 to tighten regulations on virtual currency exchanges.
The law requires cryptocurrency exchanges to register with the government and submit annual reports, and gives the Financial Services Agency (FSA) the power to conduct on-site inspections and issue business improvement orders. The rules also mandate that operators confirm the identities of customers to prevent crypto assets from being used for money laundering or terrorism.
While Japan’s regulations have been effective in preventing further major incidents, they have also had negative impacts on the industry. The FSA’s crackdown following the Coincheck hack led to a series of business improvement orders, and some companies were ordered to suspend their operations. The tough regulatory environment has made it difficult for new exchanges to enter the market and has limited the growth of existing exchanges.
Regulations and Confidence
However, some argue that the regulations have also helped to increase confidence in the sector and have attracted institutional investors. In addition, the Japan Virtual Currency Exchange Association, a self-governance body, has worked to promote best practices and transparency in the industry. Amid the ongoing impact of the pandemic, some Japanese lawmakers are calling for a more proactive approach to the virtual economy.
They believe that Web3 businesses, including those based on cryptocurrency technology, could be a key part of the country’s post-pandemic economic recovery. The ruling party is considering a range of measures, including tax breaks and the establishment of a new ministry to oversee the sector.
While it remains to be seen whether these measures will be implemented, they highlight the ongoing debate in Japan about the appropriate level of regulation for the cryptocurrency industry.