Bitcoin and Japan have had an interesting and strained relationship over the last three years. Businesses, exchanges, and digital currency trading have flourished, and even been encouraged to an extent, throughout the technologically cutting-edge country. Now, recent events and international backlash are starting to turn the national tide of perception against Bitcoin exchanges in the Land of the Rising Sun.

A Japanese Bitcoin History Lesson

When I first heard about Mt. Gox, by far the world’s largest Bitcoin exchange throughout 2012 and 2013, I didn’t know where it was. It was located in Japan, and was, in effect, the heart and soul of the Bitcoin community, giving Bitcoin a market pricing model that it needed join the financial world. It handled more than three out of every four Bitcoin transactions at its peak. Bitcoin may or may not have started in Japan, but it worked the most in Japan, even if most of its miners and customers were in The West.

After Mt. Gox’s CEO Mark Karpeles took his eye off the ball, working on a Bitcoin cafe instead of strengthening a crumbling, poorly-sorted computer infrastructure; after people like Roger Ver physically went to the Japan office to work on weekends to try and compensate for its lack of leadership; and even after Mt. Gox collapses under a cloud of theft, ineptitude and neglect, Japan embraced the nascent technology, even as it cost its customers almost one million bitcoins in February of 2014.

In this vain, the next month, government officials within the country decided to give Bitcoin a taste of economic amnesty. Bitcoin would not be treated or over-regulated as a bond or as a currency and bitcoins purchased from individuals will not be hit with a “Consumption Tax” of 8% either. In effect, a “Laisse-Faire”, anti-regulatory stance on bitcoin sales, purchases, and/or exchanges of bitcoins was created, buying the Bitcoin community in Japan

Going a step further, Japan even went so far as to allow the Bitcoin community to police itself, going forward through the newly-founded Japan Authority of Digital Assets (JADA). Supported by Liberal Democratic Party of Japan (LDP)’s Information Technology committee, like the Federal Reserve in the United States, it would even go without direct government oversight or regulation, and work autonomously. Ah, those were the days. Alas, times have changed, and the climate has changed for Bitcoin as well, there, and worldwide.

Mark Karpeles has been arrested not once, but twice for his alleged crimes against the Bitcoin community, including embezzlement and manipulating financial data. Tighter reins over how Bitcoin is handled have been called for in exchange for other forms of currency. Other countries have also taken the catchword of the day – terrorism – as an opportunity to drag Bitcoin’s name through the mud.

Bitcoin’s PR efforts are virtually non-existent, so moves are being made to start to enact policy for how Japan treats cryptocurrency. Primarily to protect consumers from another Mt. Gox episode, anti-money laundering and terrorism regulations are being considered. The introduction of a registration or licensing system for operators of digital currency exchanges is being crafted.

First reported by the Japan Times, Major Japanese regulators like The Finance Ministry, the Financial Services Agency, and the National Police Agency are expected to work with other relevant authorities on these changes. The current monetary laws on the transaction of financial products may be amended to include bitcoin and other digital currencies with legislation possibly heading to the regular Diet session next year.

New Report Sways Japanese Regulatory Sentiment

The FATF (Financial Action Task Force), an international anti-money laundering and terrorist funding regulator, released a new report in June that called for closer monitoring of digital currency exchanges worldwide. Recommendations within the “Guidance for a risk-based approach to virtual currencies” report stated that such exchanges should be registered and licensed like any other financial services and money transfer businesses.

Governments are advised to require operators of such exchanges to confirm the identity of clients, keep digital records of transactions, and report any suspicious transactions to authorities.

Over the last year, these types of changes are becoming more and more common in the world’s developed nations. The U.S. Treasury Department included bitcoin exchanges to their anti-money laundering regulations. Germany is working on putting Bitcoin transactions under its banking regulations. Banks and other financial institutions are banned from handling of virtual currencies in China, and Russia has gone so far as to block several Bitcoin-related websites in an attempt to stem the flow of information on cryptocurrency.

The goal of making Bitcoin exchanges safe for consumers to use by a nation’s government is seemingly justified and is the right move to protect citizens. The real question will be where the regulatory line in the sand will be drawn. Regulators have a bad habit of asking for an inch and taking a mile, as we have seen in New York’s BitLicense fiasco, driving most businesses elsewhere.

Japan seems destined to move from pure Bitcoin fandom to your run-of-the-mill Bitcoin regulator amongst nations.

Exchanges will be the target, and hopefully, this is where the focus stays. The risk of third party exchanges has been the bane of the community due to their inability to regulate themselves. Now that police are assigned, and Bitcoin is being taken seriously as an asset class, hopefully this may cause greater mainstream adoption without the “Wild West” image and accompanying risk holding it back.