Japan is crypto-crazy. I confirmed this assumption during a recent two-month stay in Tokyo where I met an 85-year-old woman who told me that she owned several bitcoins and was considering investing in ether. Yes, you read that correctly, she was 85! Not only is Japan now the world’s largest domestic market for crypto-token* trading activity, it is also the only major advanced economy to have developed a bespoke licensing regime to regulate businesses offering financial services dealing with crypto-tokens.
Oh, how things have changed. Back in 2014, when I worked for a bitcoin exchange in Tokyo, there was little or no interest from Japan’s Financial Services Agency (FSA) to regulate our type of business or to give crypto-tokens any legal status above that of virtual currencies used in online games such as World of Warcraft. Nor was there much interest among Japanese investors, despite the country being home to the world’s largest retail forex market.
So, what’s happened in the last three years? It started with the epic collapse of the bitcoin exchange Mt. Gox, which, aside from being disastrous for the global crypto community, was also a major PR catastrophe for Japan’s FSA, as it happened on their turf but ironically not under their watch.
So the Japanese government decided they needed to prevent a similar event from ever happening again. The result was the Virtual Currency Act, which took over two years to develop and was finally put into law in April of this year.
Part of the act requires that all businesses involved in crypto-token-related financial services must be licensed under a new regulatory framework and follow strict anti-money-laundering compliance policies.
The certainty brought about by this new regulation encouraged major financial institutions in Japan such as SBI Group to invest in crypto-token exchanges, provide them with supporting services such as bank accounts and even launch their own crypto-token-related services.
Large banks such as MUFG even developed their own cryptocurrencies and very recently several Japanese banks launched a yen-pegged cryptocurrency called J-Coin. In September, the FSA issued 11 licenses to Japan-based exchanges, which included existing crypto-token exchanges such as Bitflyer and Quoine and new exchanges offered by large financial institutions including forex specialist, GMO Group and financial data provider FISCO Group.
Thanks to the new regulations and newly licensed exchanges, the crypto ecosystem receives mostly positive coverage in Japan’s media, which is in stark contrast to the sensational reporting on the earlier days of bitcoin in Japan. “Mrs. Watanabes”, the stereotypical housewives who invest in forex using their husband’s disposable income, have taken great interest and started to switch from forex to crypto.
Japanese hedge funds and asset management firms are also entering the space, which has helped to boost liquidity among exchanges based in the country. What’s more significant besides the speculative trading is the decision among major Japanese retailers and e-tailers such as Bic Camera and DMM to accept cryptocurrencies as a means of payment. This would be equivalent to Fortress or HKTVMall accepting bitcoin in Hong Kong.
Many of the established financial institutions I spoke with in Japan expect further regulatory developments which would allow them to offer crypto-token investment and trading services as part of their existing service portfolio rather than as stand-alone, separate businesses. If this happens, then it would enable anyone in Japan to trade and invest in crypto-tokens through their existing bank or asset manager. Now, imagine if you could buy ether at HSBC!
Could we see similar developments in Hong Kong? In the short term, highly unlikely, given the Hong Kong Monetary Authority’s stance or lack thereof towards regulating businesses offering crypto-financial services in the SAR.
However, Japan’s experience as a center of this new burgeoning financial market and moves by other jurisdictions including Australia, Gibraltar and Switzerland could serve as a model to demonstrate the advantages of regulating crypto-financial service providers.
Hong Kong wants to position itself as a global fintech hub. Whatever “fintech” means. The SAR is already home to dozens of crypto-token exchanges and startups, so why not be more specific and position itself instead as the world’s leading crypto-financial hub through more progressive regulation? This would attract talent, capital and encourage established financial institutions based here to offer new services and grow new markets.
Bitcoin and other crypto-tokens are not going away anytime soon. Banks and regulators in Hong Kong should pay further attention to what’s happening in Japan and seek to build an even more welcoming and forward-looking crypto ecosystem for the SAR.
Things in the crypto world move fast, very fast. Hong Kong shouldn’t be left behind!
* Refers to both cryptocurrencies and blockchain tokens, as they are not the same thing.
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