How Japan's New Regulations Affect Bitcoin Exchanges

Japan has recently overtaken the US and China as the highest-volume country for bitcoin trading in the world. In April, the first Japanese bill with provisions for digital currencies including bitcoin will enter into force. It will recognize bitcoin as a method of payment, but at the same time, it will impose regulations on bitcoin exchange service providers.

Also read: Countdown: Bitcoin Will Be a Legal Method of Payment in Japan in Two Months

What the Bill Means for Bitcoin Exchanges

Japan’s Payment Services Act and the Act on Prevention of Transfer of Criminal Proceeds were amended on May 25, 2016, to impose certain regulations on digital currency exchange service providers, including bitcoin exchanges. The drafts of proposed amendments were announced by the Financial Services Agency of Japan (FSA) last December and are expected to take effect in April.

Any entity wanting to provide a digital currency exchange service must be registered with the Prime Minister. The amendments lay out numerous other requirements such as having a minimum capital of 10 million yen, deploying sufficient IT system defenses against theft and loss, and providing certain information to users such as their trading address, registration number and fee schedule.

Another part of the new regulations requires exchanges to establish several systems and processes, including employee training, internal rules, governance, and guidance for outsourcing. In addition, they must also regularly undergo an audit by a public certified accountant or audit firm at least once a year and submit periodic activity and annual reports.

From the Perspectives of Bitcoin Exchanges

The bill aims to protect consumers with “reasonable restrictions,” Yuzo Kano, CEO of Bitflyer, told Bitcoin.com. “Even foreign entities who provide services to Japanese residents will be regulated under the law”, he said.

Bitflyer is the largest exchange by volume today, according to Coinhills. The exchange has raised a total of $35.6 million in funding up to date, including the recent investment of 200 million yen from investors such as Mizuho Capital. Other shareholders include large Japanese corporations such as SBI Investment, Mitsubishi UFJ Financial Group, Mitsui Financial Group, Densu Digital Holdings, and GMO.

Kano noted that:

We lost trust on bitcoin three years ago and the majority of people still don’t believe in it in Japan. This is the time to recover the trust so large corporations will enter the market with various business use cases. This will eventually bring a wider range of attentions and make a bigger bitcoin-blockchain ecosystem.

Kagayaki Kawabata, Business Development Lead at Coincheck, another major Japanese exchange, told Bitcoin.com that “overall the new bill itself is a progressive bill that will position Japan as the leading Bitcoin country.” However, given that there are so many requirements, he feels that “the law will be a huge barrier to entry for underfunded early stage cryptocurrency startups”, adding that “from our standpoint, as a cryptocurrency startup started by a single programmer, it’s pretty sad that the new regulation may wipe the potential of startups like us”.

Coincheck has been experiencing substantial growth recently, with US$130 million in monthly transactions, and new signups at a rate of 1,000 every day. Its merchant processor service is also growing quickly, swelling from 1,000 to 5,000 merchants over the last year. Overall Kawabata believes that:

While there are some negative aspects to the regulation, government acknowledging Bitcoin is huge progress. When we look at the development of Bitcoin in the long term, we think the positives overcome the negatives lifting Bitcoin to the next stage.

Updating KYC Process

Kawabata explained that “there are various requirements we need to comply with to continue our exchange business,” he said. “As an operating exchange, KYC/AML and paperwork are probably the heaviest part. We need to comply with strict KYC requirements similar to banks which cause new users’ KYC process to be somewhat complex”.

For Bitflyer, Kano also admitted that “we will need to change the KYC process to fit the new rule.” In anticipation of this bill, he noted that “we have already been audited and have prepared necessary internal organization changes.”

Do you agree with the two exchanges that this bill will help take bitcoin adoption in Japan to the next level?

Images courtesy of Shutterstock, bitflyer, Coincheck, and Japan’s FSA

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