On June 4, Coinbase — one of the largest wallets and cryptocurrency exchanges in the US — revealed its plans to enter the Japanese crypto market. While Japan is renowned for its rather progressive views toward crypto (it was one of the first countries to officially recognize Bitcoin, after all), entering arguably the world’s hottest crypto market is no easy task. At the very least, Coinbase will have to please the Japanese Financial Services Agency (FSA) — the country’s major watchdog that has been noticeably nervous ever since January’s infamous Coincheck hack.
“A regulated, compliant crypto company”
Currently, the San Francisco-based Coinbase Inc. operates in 32 countries. Now that the company is expanding to Japan, Nao Kitazawa, a former investment banker at Morgan Stanley, will be named CEO of the new branch, according to Bloomberg.
In a blog post announcing the Japanese branch, Coinbase referred to itself as “a regulated, compliant crypto company in the US” that “will focus on building that same level trust [sic] with new customers in Japan.”
Indeed, Coinbase has been obedient with US regulatory bodies. For instance, in January 2017, the company obtained a BitLicense to operate legally in New York, and notified approximately 13,000 of its customers that it was turning their information over to the IRS in February. However, Coinbase has also been critical of US regulation. In March, the company voiced its concerns regarding the patchy state of regulation in the US and how it is “chilling” the market.
Thus, Coinbase has now assured that they will cooperate with Japanese watchdogs as well:
“As in other markets, we plan to take a deliberate approach to our roll out in Japan, which means working hand-in-hand with the Japanese FSA to ensure compliance with local laws at every stage”.
Japanese market and the FSA pressure
Japan is arguably the world’s largest market for cryptocurrencies. According to Japan's FSA, the country’s major regulatory body gathered data from 17 local cryptocurrency exchanges and found that as of the end of March 2018, there were at least 3.5 million crypto traders. Various trusted Bitcoin market data providers, such as CryptoCompare, show that the Japanese’ Yen accounts for about 55% of global Bitcoin trades at the time of reporting, and local reports show that 14 percent оf country’s young male workforce has invested in cryptocurrencies.
Bitcoin and altcoins can be used as a legally-accepted means of payment in Japan, although they are not considered “legal tender,” contrary to what many media outlets, including Reuters, have previously reported. This status of cryptocurrencies has been confirmed by the FSA.
Therefore, since the amendment of Japan’s Payment Services Act in April 2017, all crypto exchanges in the country are required to register with the FSA. Currently, the licensing scheme has seen a total of 16 operators cleared to serve the Japanese market, including major players such as SBI Group, while Coinbase intends to apply for a license “within the year.”
The FSA seems to have a tight grip on local exchanges, firmly reacting to security breaches after two high-profile Japanese crypto exchange scandals: January’s unprecedented $532 mln Coincheck hack and the infamous collapse of Tokyo-based Mt. Gox.
For example, in March, the watchdog sent “punishment notices” to seven crypto exchanges and temporarily froze the activities of two more after a round of inspections. Business improvement orders were sent for a lack of “the proper and required internal control systems,” with Coincheck being specifically cited as missing a framework for preventing money laundering and the financing of terrorism.
Shortly after the news, two local exchanges, namely Mr. Exchange and Tokyo GateWay, decided to close up shop over regulatory compliance. The FSA conducts on-site inspections of exchanges that have their registration pending and have asked all crypto exchanges to submit a risk management system report in the wake of the Coincheck hack.
As a result of the FSA’s thorough supervision, Binance, one of the world’s largest crypto exchanges that had opened an office in Japan, turned to Malta after the Japanese regulator had issued a warning.
On May 6, the FSA rolled out further regulatory stipulations for domestic crypto exchanges, reportedly intensifying its efforts to prevent another major hack. Exchanges will be required to monitor customer accounts multiple times per day for suspicious fluctuations and must comply with stricter Anti-Money-Laundering (AML) measures, which demand Know-Your -Customer (KYC) checks, such as ID verification.
Notably, these measures also confirm previous reports that government-registered exchanges will face tight restrictions – effectively a ban – on the trading of anonymity-oriented altcoins, such as Dash (DASH) and Monero (XMR), in the near future.
In response to regulatory pressures, a self-regulatory body has emerged, comprised of the local exchanges. It’s called the Japan Cryptocurrency Exchange Association (JCEA), and, as Cointelegraph previously reported, the idea behind this body is to set the standards and expectations of the exchanges which are not currently registered and up to scratch with the FSA.
Indeed, Taizen Okuyama, president of Money Partners Co., who has assumed the post of chairman, said the goal of the JCEA is to dispel customers’ anxieties and achieve the sound development of the market
“We are preparing self-regulation rules from now on, we want to aim for further development of the industry and generalization of the virtual currency, dispeling anxiety of customers that came about from the case of Choincheck, restoring confidence.”
Foreign players move in
Japan’s Payment Services Act allows foreign operators to register in the country as “virtual currency exchange service providers” under certain conditions. Thus, such a company would need to “consult with the Local Finance Bureau nearest their main office established in Japan,” which would supervise the application process.
The local crypto industry has not been largely explored by international parties, although recently the situation has started to change. On May 30, the first foreign player entered the Japanese crypto exchanges market, when local exchange BitTrade was bought for S$67 mln ($50 mln) by Singaporean multi-millionaire and entrepreneur Eric Cheng. As a result of the deal, he took a 100% stake in BitTrade Co., Ltd. Commenting on it, he expressed his opinion on the local market and the FSA regulations:
"The cryptocurrency industry is growing exponentially. Against this backdrop, the key to capturing the rising demand is having a well-regulated and licensed outfit. With this Japanese FSA-licensed platform, I will work closely with the regulators to scale this platform globally."
While Coinbase plans to establish their operation in Japan “within the year,” the Japanese arm of the internet giant Yahoo! will reportedly open their own exchange “in April 2019 or later,” albeit through buying 40% of BitARG Exchange Tokyo instead of creating a new outlet.
A number of foreign players have chosen to leave the Japanese market because of the regulations. Thus, in addition to the aforementioned Binance, the San-Francisco-based Kraken has announced that it will cease serving residents of Japan by mid-June. The decision to quit reportedly involved "careful consideration of revenue against the costs and resources required to maintain service".
Competition gets tough
As mentioned above, there are 16 registered crypto exchanges in Japan. Coincheck, formerly the largest cryptocurrency exchange in the country, allegedly generated around $150 million in quarterly profit (the company reportedly earned $490 million from April 2017 through January 2018). However, after the heist and change of ownership (the company has been bought by Monex Group Inc.), the future doesn’t seem very bright for the exchange, as Monex CEO Oki Matsumoto told Bloomberg:
“Given that we expect tougher regulatory and internal measures going forward, naturally the profitability will change.”
The title of being the largest player is likely to be taken by Japan`s financial services giant SBI Holdings. The company plans to launch its bank-backed crypto exchange this summer, supporting Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), and Bitcoin Cash (BCH). On June 4, SBI Holdings announced that its in-house crypto exchange has gone live. Called ‘VCTRADE,’ the service became accessible for about 20,000 users who had pre-registered with the platform in October 2017, with plans to open ordinary account applications in July 2018. XRP is the only supported coin at the moment.
When announcing their broader plan, SBI Holding’s president Yoshitaka Kitao suggested that BCH would be regarded as the settlement currency, since the scarcity of BTC makes it expensive and “tiring as a settlement currency.” He added that XRP would be a remittance currency. Kitao wasn’t shy to state that the exchange “will be number one in the blink of an eye.”
"When we do it, it will be number one in the blink of an eye so quickly [sic], so even if a tremendous number of customers come, we can build a system that can bear [sic]. We have to pursue safety thoroughly.”
Coinbase’s Japanese trading service will focus on supporting major digital currencies such as Bitcoin (BTC) and Ethereum (ETH), as CT Japan reported. Indeed, the service does not currently support XRP — an important altcoin for the country, with 24-hour trading volume of approximately ¥57,608,447,391 ($524 mln) — while, conversely, the altcoin seems to be their competitor’s primary interest, at the moment.