The Strength and Survival of Japan in the Cryptocurrency Sector

Despite the Mt. Gox scandal taking place in Japan and tarnishin the image of cryptocurrencies, the Asian powerhouse is increasingly becoming an epicentre for bitcoin and cryptocurrency; from pioneering regulation and legislation to the swelling adoption, here we provide an overview of the history of the crypto sector in Japan.

On September 4, 2017, the world woke up to the news that China had banned ICOs in the country. The news came as unsettling and substantially disrupted the price of cryptocurrency, as there was a plunge in the prices.

Although 2017 was an eventful year for cryptocurrencies, with bitcoin almost reaching the $20,000 mark and ICOs taking over and dominating the crowdfunding landscape with a many record-breaking ICO campaigns, China’s move sent ripples across the market. In the aftermath of China’s ban, many traders were unable to participate in the market. The most felt aspect of the regulation was the prohibition of exchange platforms as cryptocurrencies serve as the pillar of the cryptocurrency trading market. As a result of China’s unfavorable environment for cryptocurrencies, many of them moved to Japan.

Japan, unlike China, has a friendly and favorable market and it saw an influx of cryptocurrencies and crypto traders. The Japanese Financial Services Agency (FSA) began granting an operating license to a many crypto exchange platforms. The balance of the crypto trade in the Asian stage began to shift from China to Japan. The transformation as increased Japan’s stature as far as cryptocurrencies are concerned. The country continues to create a conducive atmosphere for the thriving of cryptocurrencies. Japanese officials have expressed their preference for regulations that improve the constancy of the market rather than stifle its growth.

Japan’s Position on Cryptocurrency

In the Asian scene, Japan is the only country that is standing as a strong supporter of the cryptocurrency. With China’s ban and South Korea’s threats, Japan poses as a favorable market for traders and startups and it is the heartbeat of cryptocurrency in Asia. The FSA ruling in 2017 effectively recognized cryptocurrencies as a means of payment. Though not a legal tender, the law allows cryptocurrencies to be used for payment settlement within the country.

Despite the friendly atmosphere that the country has provided for cryptocurrencies and its friendly policies, there are strict AML and KYC protocols in effect in Japan as far as the operations of the cryptocurrency trading platforms are concerned.

Japan, however, has experienced two significant hacks that happen to be the worst in the history of Bitcoin; the Mt. Gox hack of 2014, and the Coincheck hack of 2018. Both exchange services suffered heavy losses and Mt. Gox was forced to shut down, and its owner was arrested. Despite all these, Japan has not turned its back on cryptocurrency, as the FSA has put regulations in place to protect customers and sanction erring Bitcoin exchange platforms.

The country has become the most forward-thinking jurisdiction for bitcoin and virtual currency. In a significant step to adopt bitcoin, Japan has granted the cryptocurrency legal status as a method of payment. The price of bitcoin has been strengthening, following the accomplishment of legal tender for cryptocurrencies, which was said to be effective on April 1, 2018.

“Magic: The Gathering Online eXchange”

Mt. Gox, an online bitcoin exchange based in Tokyo, Japan, was the largest bitcoin exchange in the world, handling up to 70 percent of all bitcoin transactions. The cryptocurrency was at the top of the bitcoin trading food chain, and its CEO, Mark Karpeles, was having it all good. It was established in 2010, and it steadily and quickly grew to the peak of the bitcoin trading market. But in 2014, it came crashing down, after the biggest hack occurred on its platform. Over 700,000 BTC worth $473 million dollars was stolen. (Current worth: $4.77 billion )

Before the hack occurred in 2014, there had been an intrusion that occurred on the platform three years ago in 2011. It remains how many hackers hacked into the system, but some hackers broke into the system and transferred a significant number of BTC from customers’ wallets and selling them on the exchange. More than $8 million worth of BTC was stolen, but what came three years after was enough to shut down the platform and have its CEO arrested.

The hackers that carried out the 2014 Mt. Gox hack used a transaction malleability attack. Lack of adequate security, adequate version control protocols, and inefficient set up of the software development provided a good opening for the hackers to strike with ease and make unauthorized transactions. As a result, a staggering 744,408 BTC had already been stolen from the platform.

Due to the massive scale of the theft, the exchange platform immediately declared bankruptcy with about 127,000 customers losing their investments. The CEO, Mark Karpeles, was immediately arrested and charged with fraud. The news of the hack sent shockwaves throughout Japan, and the platform never recovered from the hack.

Major Bitcoin Exchange Platforms in Japan and the FSA Crackdown

In January 2018, the Japanese exchange platform, Coincheck, announced that it had been hacked, with $543 million worth of cryptocurrency, NEM, stolen, making it the biggest crypto hack in history after the Mt. Gox hack in 2014.

Days after the attack, the FSA cracked down on Coincheck and slammed the platform with a “business improvement order,” ordering the platform to give a full account of the hack and find ways on how to pay customers back. The FSA issued another “business improvement” order, which is not a good sign for the company.

In light of the Coincheck hack also, the FSA ordered the shutdown of two cryptocurrency exchange platforms, FSHO and Bitstation, ordering them to suspend activities for a month, starting from March 8, 2018. According to the FSA, FSHO failed to put in an effective and appropriate system to monitor trading, and it had not adequately trained its employees.

Bitstation, on the other hand, was suspended, after an executive was siphoning digital currencies deposited and using it for personal use. The FSA penalized five bitcoin exchange platforms and ordered them to improve risk management to prevent future hacks.

In March 2018, the FSA offered a warning to Binance, a major cryptocurrency exchange, for operating without registering in Japan. The Hong-Kong based cryptocurrency exchange was operating without a license for virtual currency through the internet. Binance soon plans to move to Malta.

Popular Companies Investing in ICOS

Source: Bloomberg

In Japan, ICOs are enjoying investments from big companies. This move will boost ICOs, and they can even set new records with investments from these giant companies.

Global Brain

One of Japan’s largest Venture Capital firms, Global Brain, in 2017, doubled down on the blockchain industry and carried out a research and participated in Initial Coin Offerings (ICO). The new subsidiary, called Global Brain Blockchain Labs Corporation (GBBL), will assist Japanese venture capital fund’s investment activity in the blockchain space, and it included supporting Singapore-based Bluzelle and Filipino remittance and payments startup Coins.ph.

In a statement made by the company in 2017, it said that with the recent movement of initial coin offerings, Global Brain was ready to support blockchain startups, from equity finance to ICO, to pursue and create a mixed financing structure for the startup to grow.

In 2017, startups were able to raise $6 billion through ICOs, as it is a fast way to raise capital and millions of dollars in minutes.

According to the venture partner of Global Brain, Takashi Sano, the Japanese venture capital fund will invest $5 million in blockchain startups per round.

JAFCO

Japan’s largest venture capital, JAFCO, in 2017, invested $15 million into Tech Bureau Corporation. Together with Infoteria Corporation who invested $1 million in Tech Bureau’s Series D offering and other investments it received from other VCs worth $9 million in August 2017, Tech Bureau raised over $25 million to develop and launch its integrated ICO platform, COMSA.

Coincheck

Coincheck, Japanese bitcoin exchange, in 2017 launched an investment program to help startups that are running Initial Coin Offering (ICO) or that are engaged in digital currency business. Coincheck was to use its own accumulated funds to invest in startups.

Roger Ver

Born on January 27, 1979, in San Jose, California, Roger spent most of his formative years in the Silicon Valley and living with his predominantly Christian family. Roger was already running a successful business, selling candy bars and making $50 per week. Later on, he moved out of his family house, when he and his father quarrelled about a car he purchased.

In 1999, before he got into blockchain, he started Memory Dealers as a wholesale enterprise for computer spare parts. The company’s website service, MemoryDealers.com offered a wide variety of custom transceivers and memory hardware. In 2014 when he was 25, he became a millionaire as Memory Dealers’ clientele grew tremendously. Roger was the CEO of the company from 1999 – 2012.

In the year 2000, Roger decided to go into politics and ran as a Libertarian candidate for the California State Assembly. Roger based his campaign on issues like the war on drugs, taxation, and the operation of the ATF. At a debate held at the San Jose State University, he argued vehemently against taxes, calling them illegal as well as declaring the war on drugs as immoral and finally described the ATF as being thugs and murderers.

A former American and Japanese citizen, earlier known as the “Bitcoin Jesus,” is a leading figure in the bitcoin cash community. Over the years, Roger has been synonymous with many controversial issues concerning the Bitcoin space. Roger was a major contributor to the Bitcoin Foundation, one of the earliest supporters of Bitcoin; however, he now spends most of his time promoting Bitcoin Cash. He is also the CEO of bitcoin.com, a media outlet he uses to promote Bitcoin Cash as the “Real Bitcoin.”

The Bitcoin Academy at Bitcoin.com misguides users (usually newbies) to believe BCH is Bitcoin.

Move to Japan

In 2002, Roger pleaded guilty to the charge of dealing in explosives without a license. He was selling explosive firecrackers and marketed as Pest Control Report 2000, which was a firecracker popular among farmers, and used to scare away birds from crops. He was sentenced to ten months in prison and he alleged that he was the only one arrested, while the manufacturers were told to stop production. Sensing injustice, he started learning Japanese while in prison.

Roger at the time, felt that he was unfairly prosecuted because of his campaigns against the ATF. He alleged that he was forced to enter a plea bargain or risk being sent to prison for up to 8 years. Roger served ten months at the Lompoc Federal Penitentiary after which he was put on probation for three years. On the last day of his probation, Roger moved to Japan.

Interest in Bitcoin

Roger was very interested in startups and invested millions of dollars in various Blockchain-based startups, as he became more involved in cryptocurrency. He invested in different ventures like Ripple, Kraken, BitPay, and Blockchain.info. His company’s website, MemoryDealers.com became one of the first to enable bitcoin payments. He also created an online store that allowed bitcoin to be used as payment for the items listed in the store called bitcoinstore.com.

Bitcoin Cash

Roger Ver was one of the earliest vocal supporters of Bitcoin Cash after the fork from the Bitcoin network which led to its creation. Critical of block size limits and the associated mining difficulty algorithm adjustments that had been plaguing the core Bitcoin network, Roger was a big supporter of increasing the block size limit. When the network could not come to a consensus of the implementation of BIP 91 which was supposed to introduce the SegWit protocol, Roger was among those who supported the fork that led to Bitcoin Cash.

Cryptocurrency Exchanges in Japan are Lacking Engineers

The major problem that cryptocurrency exchanges in Japan are facing, is the shortage of engineers. In the wake of the Coincheck hack, the exchange platform explained that part of the reason why hackers were able to steal $530 million was that the problem was beyond it because Japan did not have enough software engineers. Chief Executive, Koichiro Wada, said that they were aware of the fact that they did not have enough hands working on internal checks, management, and system risks. They tried to use headhunters and agencies, but in the end, could not avoid the massive hack.

Coincheck, however, is not the only one having this problem. Lots of companies around Japan’s expanding cryptocurrency are scrambling to hire engineers, including experts in blockchain and cybersecurity experts. The FSA is breathing down the necks of these exchange platforms to beef up their security system to prevent another hack. The lack of software engineers makes these platforms susceptible to theft. According to Alexander Jenner, a headhunter at Computer Futures in Tokyo, the cryptocurrency sector is proliferating and more prominent exchange platforms are surviving. But with the absence of software engineers, many of them will fail.

About 32 exchange platforms operate in Japan and demand is exceptionally high for these engineers with skills that could aid growth, design user-friendly interfaces, and write codes that help withdrawal of digital coins as well as their security expertise needed to protect the consumers.