At the beginning of 2019, Japan wasn’t on anyone’s radar. Now the region has become one of Asia’s fastest-growing security token hubs in just under a year.

Digital securities and tokenization are a global phenomenon that is happening at this very moment in a slow, drawn-out dance between finance and technology. Digital transformation occurs in different ways and at different speeds all around the world. What some might call a race to be the first to develop the next generation of financial infrastructure requires regulators, lawmakers, entrepreneurs, investors, banks, and financial institutions to all work together in order to make it possible.

As a result, security token ecosystems are evolving all around the world in their own way. One country that has seen lightning growth in short order is Japan. At the beginning of 2019, all eyes were looking at Singapore as the poster platform in Asia for finance and technology to cooperate, specifically with a progressive regulator supporting adoption. As a result, several exchanges and issuance companies were already making announcements about their plans all while Japan lay dormant on the subject.

It wasn’t until May later that year that Japan finally appears on the global radar. Japanese legislators passed a bill to support security token infrastructure and things started brewing in the region shortly thereafter.

A Little Outside Help

It just so happens to be that the CEO of one of the US’s leading issuance platforms is also fluent in Japanese due to his previous career. Securitize’s Carlos Domingo was one of the first people to recognize the potential of the country and began focusing there in June with an announcement to support the first educational advocacy organization for security tokens in Japan. At the time, Carlos shared with The Block the following statement:

“Our partnership with the Japan Security Token Association illustrates our dedication to the Japanese market and our belief that Japan will continue to be one of the leading traditional financial centers but also in the development and adoption of digital securities as the future of all securities.”

Securitize was not planning to stop there. Carlos was actively having discussions with banking giant MUFG (the fifth-largest bank in the world and Japan’s largest bank) and with Japanese investment bank Nomura Holdings to get investments from them — officially — in September. Later in November, Securitize announced an investment from Japanese asset manager SBI and in February of 2020 an investment from Sony Financial.

In December, Securitize presumably used some of those proceeds to establish a larger footprint in Japan by acquiring BUIDL, an enterprise blockchain consulting firm in Tokyo. Advisory services for issuers and financial managers to understand how to apply security tokens are critical educational and support resources needed to establish a security token ecosystem.

Instead of Japan needing to rely on a homegrown tokenization platform, Securitize provided a ready-to-go solution and teamed up with local blockchain experts to fill this missing component in the ecosystem.

Voluntary Self-Regulation

As the scene started to heat up, Japan’s investment banking community did something that many others around the world, including Wall Street, failed to do. They organized. Many of the biggest investment banks in Tokyo came together and created the Japan Security Token Offering Association and declared it the country’s self-regulatory organization (SRO) for the industry. Of the six founding members, 1/3 were investors in Securitize.

As an SRO, the banks will play a critical function in setting industry best practices, policing bad actors, and fostering infrastructure. Many look towards FINRA, America’s financial SRO that works hand-in-hand with the SEC, as a golden standard for what a great SRO can do to help manage and support a financial community.

MUFG was not one of the members of the JSTOA, but they themselves have a noteworthy initiative that launched just one month after. The Security Token Research Consortium was created with MUFG and 21 other members, including KPGM and Accenture, to develop next-generation financial transaction services using blockchain technology. The group intends to share its knowledge and findings publicly as they trial the technology. It is likely also not a coincidence that MUFG-backed Securitize was named the consortium’s exclusive tokenization provider.

At best, other various ecosystems have an advocacy industry group for the industry with one or two financial institutions as members. No one — other than Japan — has established an SRO, let alone a communal research effort dedicated to digital securities. Since the SRO has both larger and younger members (with SBI being the leader of the association), it seems that the government has also given them their support. A banking community that is ready to work with regulators and the industry to foster the adoption of security tokens is something few other countries can claim.

Pilot Run

The region’s first STO was launched in October by Lead Real Estate, a developer who tokenized a fund to raise capital to develop condominiums and hotels in popular areas such as Ginza, Shinjuku, and Shibuya. The offering itself was issued in the US using private fundraising exemptions there to expose both US and international investors to the opportunity. The offering was hosted on Japan’s choice platform, Securitize.

Shortly after, a Tokyo-based investment bank MBK tokenized real estate in Estonia using its own subsidiary, AngooFinancial, to offer fractional ownership of European real estate to its clients back home. Some of Japan’s STOs needed to leverage outside jurisdictions because Japan’s regulations make it extremely cumbersome to properly issue an STO unless you are an investment bank. The earlier bill that was passed changes all that but doesn’t go into effect until May 1st, 2020. As a result, much of the focus has been on preparing the ecosystem and trialing the technology internally.

Securitize’s influence dominates the region…

Nomura was also busy innovating by recently piloting the first tokenized bonds in Japan out of its Institute of Capital Markets Research division (which also has its own security token research consortium with over a dozen members). And only weeks before this, Mitsui & co. — an investment bank that is also a member of Nomura Research’s consortium — announced its own blockchain platform for real estate securitizations and other assets. Finally, LIFULL, a half-billion-dollar Japanese real estate group partnered with Securitize and BUIDL in order to launch a crowdfunding platform for tokenized real estate offerings.

With May 1st around the corner, it seems that Japan’s security token infrastructure has made as much progress as it could without the fixed STO regulations yet being in effect. With financial institutions researching and trialing the technology, several STOs and tokenizations already going live, and a supportive government behind the industry, Japan quickly established itself as one of the leading ecosystems in the world.

Building to Liquidity

Japan‘s ecosystem was clearly developing fast but one key element wasn’t being addressed firsthand — liquidity. Where Singapore had multiple exchange platforms working in a regulatory sandbox, Japan had none. One way to address the challenge was by working with outside providers. If you can’t beat em’, join em’!

In this case, Tokai Tokyo Financial Group made an investment into iSTOX, which is a leading security token exchange in Singapore, including having the Singapore National Exchange (SGX) as a backer. The Japanese investment bank potentially hedged its bet with a local solution as well by investing in cryptocurrency exchange, Huobi, which has made several efforts already to be able to list and trade security tokens.

SBI’s CEO also announced in March that they intend to launch an FSA approved national security token exchange within this year. Similarly, SBI also partnered with the Boerse Stuttgart and invested in the BSDEX, the german exchange’s digital securities platform. With SBI leading the JSTOA, investing in several infrastructure companies, and sharing plans to create their own exchange, they certainly appear to be one of the most bullish firms in Japan on security tokens.

And what about the Tokyo Stock Exchange (TSE) — has Japan’s largest trading venue embraced blockchain the same way? Well in Q1 of 2020 the TSE announced it would begin a blockchain pilot with its 44 member alliance, which includes MUFG, SBI, and Nomura. This would certainly imply the exchange is interested. It seems that all of Japan’s financial community is in harmony when it comes to adoption.

What's Next?

With the impending rule changes in May and an ecosystem that is poised to thrive, it’s no secret that Japan will be a major force in the security token space this year. We can expect a lot of Japanese assets and equities to reach foreign audiences via STOs and vice-versa, new opportunities for Japanese investors to participate in. Additionally, we can assume a large community will rise up as an education effort spans the region through various associations/ consortiums. As a result of these combined efforts, Japan has managed to mobilize into a leading security token hub within just one year. This is a playbook that every country that is behind should want to follow.