From Stablecoins to Blockchain Trials: Japanese Players Are Going Crypto as the Local Government Is Overseeing the Market

The beginning of the year was particularly eventful for the Japanese crypto ecosystem, which is generally considered to be a major part of the industry. First of all, Japan’s Central Bank (BoJ) issued a study on the role of central bank digital currencies (CBDCs) in the current monetary system, a topic that was widely discussed by the country’s officials last year.

Secondly, major domestic trading company and investment bank, Marubeni Corporation and Daiwa Securities Group, reported blockchain-related advancements in their businesses. Finally, local banking giant Mizuho Financial Group announced the launch of its custom stablecoin.

Time to observe this news closer and see what has been happening with crypto in Japan.

It’s still unclear whether Japan will issue a CBDC

Japan’s authorities have been notably hesitant about the idea of introducing a CBDC, which might seem surprising at first, given that cryptocurrencies can be used as a legally accepted means of payment in the country (although they are not considered “legal tender”).

CBDCs — just like Bitcoin (BTC) and altcoins — are also virtual currencies. The main difference is that they are issued and controlled by a federal regulator. Hence, CBDCs are not decentralized, unlike many digital assets. Basically, they represent fiat money, albeit in digital form. Each CBDC unit acts as a secure digital equivalent to a paper bill and can be powered with distributed ledger technology (DLT).

Consequently, if central bank decides to issue a CBDC, it becomes not only its regulator, but an account holder as well, as people would have to store and access their digital money via this bank. That places CBDC-issuing central banks on a par with private banks.

CBDCs could be seen as central banks’ response to the growing popularity of cryptocurrencies, which bypass regulators’ purview due to their decentralized design. Federally-issued currencies, in turn, aim to take some of the main features from crypto — namely the convenience and security — and combine them with the proven attributes of the conventional banking system, in which money circulation is regulated and reserve-backed.

At this point, the BoJ has publicly criticized the concept of CBDCs twice. First, in April 2018, its deputy governor, Masayoshi Amamiya, declared that such currencies can have a negative impact on the existing financial system. Specifically, he expressed his concern about taking on the role of private banks:

“The issuance of central bank digital currencies for general use could be analogous to allowing households and firms to directly have accounts in the central bank. This may have a large impact on the aforementioned two-tiered currency system and private banks' financial intermediation.”

Then, on Oct. 20, Masayoshi Amamiya expressed his doubts regarding the effectiveness of CBDCs, adding that his agency won’t be issuing its digital currency in the near future.

Specifically, Amamiya responded to a theory suggesting that CBDCs can help governments overcome the "zero lower bound" — a situation in which interest rates fall to zero and the central bank loses the capacity to stimulate the economy. According to this approach, a CBDC would enable central banks to charge more interest on deposits from individuals and firms, and hence motivate them to spend money and vitalize the financial system.

The deputy governor questioned that theory, claiming that charging interest on central bank-issued currencies would only work if central banks fully eliminate physical money from the local economy. Otherwise, the public would still continue converting digital currencies into cash in order to avoid paying interest.

The elimination of fiat money in Japan is “not an option for us as a central bank,” since cash is a popular method of payment in the country, Amamiya added. Indeed, Japanese society is still mostly cash-based, as about 65 percent of transactions are reportedly done in paper money (which is more than double that of other developed economies).

Japan loves its cash

The BOJ deputy governor continued that thought by stressing that his agency is not planning on creating a CBDC that can be widely used by the public for settlement and payment purposes. The shift to bank-issued crypto from the existing sovereign currencies seems to be "quite a high hurdle,” as crypto assets are often associated with speculative investments and do not represent a stable means of payment, he noted.

Further, the central bank examined the role of CBDCs in the current monetary system in a report released on Feb. 19. The paper was written by representatives of the University of Tokyo and the BoJ.

The report divided possible CBDCs into two categories, the first being those accessible to the general public for daily transactions instead of banknotes and the other as those limited for large-value settlements.

Interestingly, after explaining that CBDCs of the latter kind wouldn’t bring a lot of new features to the monetary system — as it has already been digitized — the report’s authors focused on the first category throughout most of the document. The report stressed that DLT could be applied to such token-based CBDCs.

The working paper noted that blockchain-based CBDC could lower the level of anonymity of its users, as cash money cannot be tracked and hence is used for criminal activities. Here, the authors referenced the example of the People's Bank of China (PBoC), which announced its intent to issue a digital currency to curb tax evasion back in 2016.

Notably, the document doesn’t necessarily reflect the official views of the BoJ and was published to stimulate further discussion on the topic, which suggests that Japanese officials have not given up on the idea of issuing a CBDC.

The FSA continues to apply scrutiny toward the local crypto industry

The Financial Services Agency (FSA), the national financial regulator, is known to have a tight grip on local digital asset exchanges. It comes as no surprise, given that the country has witnessed the two largest crypto hacks in history: namely, last year’s outlandish $532 million Coincheck hack and the notorious crash of Tokyo-based Mt. Gox. In the wake of those security breaches, the watchdog has introduced numerous precautions, including on-site inspections of exchanges’ offices and mandatory risk management system reports.

As per Japan’s Payment Services Act, amended in April 2017, all digital currency exchanges in the country are required to be registered with the FSA. The agency has granted the most compliant players with licenses. Currently, the pool of exchanges cleared to serve the Japanese market currently is represented by 17 platforms: Money Partners, Liquid (previously known as Quoine), Bitflyer, BitBank, SBI Virtual Currencies, GMO Coin, Btcbox, Bitpoint, Fisco Virtual Currency, Zaif, Tokyo Bitcoin Exchange, Bit Arg Exchange Tokyo, FTT Corporation, Xtheta Corporation, Huobi and Coincheck. The latter managed to secure its license just recently, almost a year after it suffered from a major hack.

Notably, the agency’s tough supervision has prompted some major players to quit the Japanese market. Thus, Binance, one of the world’s largest crypto exchanges that had once opened an office in the country, turned to Malta — the famously crypto-friendly country — after the Japanese regulator had slapped it with a warning in March 2018. Similarly, local social messaging app Line has also decided to exclude the domestic market prior to the launch of its cryptocurrency exchange, citing local regulatory difficulties.

Nevertheless, the FSA’s severity hasn’t scared everyone off. As many as 190 exchanges are reportedly pending the agency’s approval to enter the local market. Perhaps the most notable example here is United States-based Coinbase, which has made positive remarks about Japan’s crypto regulatory climate in the past, saying that the FSA’s intense focus on security is “good for us.” Given that Coinbase originally planned to establish its operation in Japan within 2018, the financial agency is likely to approve or decline its application at some point in the next few months.

Moreover, the Japanese arm of the internet giant Yahoo will reportedly open their own crypto exchange “in April 2019 or later.” Other players that will potentially open a crypto exchange in Japan include Mitsubishi UFJ Financial Group, the largest domestic bank, and Money Forward, the company behind a popular financial management application.

In December 2018, the FSA published a draft report that introduced the new regulatory framework for cryptocurrencies and initial coin offerings (ICOs) in the country. In it, the agency continued to strengthen security requirements for local crypto exchanges, focusing on private keys management, among other things. Further, the FSA urged players to join the Japan Virtual Currency Exchange Association (JVCEA), a self-regulatory body comprised of domestic industry participants. Moreover, the financial watchdog suggested that ICOs might become subject to securities regulation in the future. Indeed, previously, local media reported that the agency was going to