Late last year, Japan looked like the Bitcoin capital of the world. Prices were soaring, buoyed by millions of Asian investors. As China cracked down on crypto exchanges and South Korea threatened to do the same, Japan stood out as a crypto-friendly nation. In 2017, Japan declared Bitcoin to be a legal form of payment and now has 16 licensed cryptocurrency exchanges. I would walk through Shibuya and pass a billboard with a model posing seductively with a huge Bitcoin, as well as stores announcing that they accepted Bitcoin and Ether.







Then, as if to punish Tokyo for its good intentions, hackers struck a Japanese exchange. In January, they stole more than $500 million from Coincheck. Coincheck, which had not yet received its official exchange license, paid back most of that money to its customers. But the incident deeply spooked Japanese regulators, and the cloud over the industry has yet to lift.





On the surface, Japan still looks friendly enough. Just this week, in an article about US cryptocurrency exchange Coinbase’s move to Japan, a Wall Street Journal article described the country as a “cryptocurrency paradise,” pointing out that around two-thirds of Bitcoin trading is yen-denominated. As of March, Japan may have had over three million crypto traders, mostly in their 20s, 30s and 40s.







Today, no one in Japan’s crypto industry would refer to the environment as a paradise. Since the Coincheck hack, no new exchanges have received licenses, a situation that Tokyo-based attorney So Saito calls “quite unusual.” Ken Yagami, Japan country manager at crypto wealth management firm Swissborg, phrased it more strongly in an April article for Longhash. "Now, with hundreds of licenses waiting to be approved and ICOs anxiously still waiting for the nod of approval, the Japanese crypto and blockchain community feel a strong sense of crisis,” Yagami wrote.





Just this month Japanese regulators rejected an application from FSHO, a Yokohama-based company, to run a cryptocurrency exchange.





Japan’s crypto industry is regulated by the Financial Services Agency, or FSA. Saito noted that the “FSA’s attitude to the industry has drastically changed because of Coincheck’s incident.” Not only have no new licenses been granted, but as of late May, no new coins had been added to the Japan’s “white list” of legal tokens. In March, several cryptocurrency exchanges were punished, even suspended, for failing to comply with regulations.







Nor is it a great time to do an ICO in Japan. “There are two ways to sell ICOs in Japan, but both are difficult now,” Saito explained. The first method is for an ICO issuer to get a virtual currency exchange license. The second would be to delegate all sales activity to a Japanese licensed exchange, or a so-called ICO platform. The first method is costly and takes six months, Saito said. The problem with the second method, he added, is that there are currently no ICO platforms approved by the FSA. “There are 16 licensed exchanges in Japan now, but it seems none of them are allowed to sell ICOs,” he said. According to data from blockchain analysis company Elementus, funds raised by Japanese ICOs from late 2017 to early 2018 plunged by about 70 percent.





The FSA is requiring more and more from exchanges, Saito notes, such as robust internal control, cybersecurity measures, and know-your-customer or KYC processes to conduct due diligence on users. Hitomi Yamamoto, co-founder of the cryptocurrency exchange Xtheta, told me her exchange has received questions and visits from Japanese regulators since Coincheck’s hack. The public sentiment toward crypto isn't entirely warm, either. Yamamoto mentioned that the Osaka-based Xtheta had not been able to find office space in Tokyo, because building owners saw cryptocurrency as ayashii, or suspicious.





The constant need for regulatory approvals can make it difficult for businesses to get things done, and if the situation continues, crypto startups and other talent will start leaving Japan.





In truth, Japanese regulators have never been all that relaxed. “When we initially filed the application, there were 177 things we needed to check off, and each one is really heavy,” said Mike Kayamori, CEO of Quoine, another licensed exchange. Questions were along the lines of, do you have a risk management committee, and where is the documentation? When you add it all up, he said, “as a start up, a fintech company coming into crypto, it’s almost impossible to comply.”





It’s not just startups who feel the heat. Changpeng Zhao, CEO of Binance, the largest cryptocurrency exchange in the world, received a warning from the FSA about servicing Japanese users. But Zhao told me that he had no intention of being based in Japan. “We learned about Japan and then we said, well, Japan’s rules about exchanges are a bit too strict, it doesn’t work for us.” He believed that complying with Japan’s strict rules would put Binance at a competitive disadvantage, in part because of Japan’s whitelist of acceptable coins. “We list hundreds of coins, we list a new coin every other day,” he said.





Crypto businesses will flow to countries with friendlier regulations. Hacking victim Coincheck, which was sold to Japanese brokerage firm Monex, is expanding to the United States. Its new leadership suggested that America might be a better environment than Japan. “Japan may seem like it’s one step ahead in crypto, but in terms of deciding what’s a security or a token and attracting institutional investors, the U.S. and Europe are moving ahead,” Monex CEO Oki Matsumoto told Bloomberg.





“Japan is struggling between innovation and control,” Kayamori said. While he stressed the importance of crypto regulation, he feared that too much control threatened to stifle innovation. ICOs are just one example. While ICOs have been plagued by scams, one could argue that in Japan, legitimate ICOs could serve a valuable purpose. Japan’s venture capitalists are not known for their enthusiastic embrace of risk, and this means that small but exciting startups may never get a chance. ICOs would allow these startups to bypass VCs and raise money directly from the public. “Japan always dreamed of building a Silicon Valley, which hasn’t happened,” Kayamori said. “They’re putting all these measures to spur innovation, but risk capital still hasn’t come in.”







There are plenty of good reasons for Japan to embrace blockchain. By positioning itself as a crypto capital, it could brand itself as a fintech center and attract talent from around the world. Perhaps crypto could even help Tokyo address the problem of low consumption. If people made enough profit from cryptocurrencies, then maybe they would finally start spending money. The other obvious benefit for the government is all the tax revenue they can receive from crypto trades.





Some are optimistic that Japanese regulators will eventually lighten up. After all, this isn’t the first time Japan has suffered a crypto hack. The 2014 hack of Mt. Gox resulted in the disappearance of hundreds of millions of dollars worth of Bitcoin. Not only did Japan survive that hack, it went on to become a crypto capital. In the best-case scenario, the Coincheck hack will ultimately make Japan’s crypto industry stronger and its investors safer. Kayamori, for one, believes that will happen.





“I think Mt. Gox really stopped innovation or adoption of Bitcoin for two years,” he said. “Coincheck for me is like six to nine months. And after that it’s going to be better.”







This article was last updated on June 12, 2018.







