From being the alleged birthplace of Satoshi Nakamoto to having some of the most crypto friendly laws, there are few countries that have embraced Bitcoin as enthusiastically as Japan. A study by the country’s Financial Services Agency (FSA) showed that there were over 3.5 million people trading and speculating a combined annual $600bn+ in Japan in 2017. At the country’s peak, this represented an estimated up to 60% of global BTC trading volume. The global exchange, Binance, even ranked Japan as its second largest user base in 2018, highlighting the continued importance of the Japanese market to exchanges.

The Friendly Face of Regulation

This rapid acceptance of cryptoassets has been partially driven by Japan’s regulatory environment, which is seen as one of the more progressive in the world. In 2017, the country recognized cryptoassets as legal tender with the Payment Services Act, and subsequently, set out clear tax guidelines for investors. The industry has also been granted a latitude of governance freedom, forming a self-regulatory body to formulate rules and industry wide standards for members to adhere to.

The Japanese Virtual Currency Exchange Association, which represents 20+ Japanese organizations, is seen by the FSA as a means to enable the industry to stay flexible and keep up with the fast changing environment surrounding cryptoassets. To ensure this, the FSA is currently doing four main things:

Seeking to force ICOs to register with the agency before raising money from investors; in line with US and EU regulations

Imposing stricter KYC and AML regulations on exchanges

Limiting the amount of leverage for trading

Imposing advertising restrictions

Despite this, the $540m hack of Coincheck and Zaif (as well as the wider market downturn) has led to the implementation of additional regulation to protect retail investors. Although there have been persistent rumors that a Japanese-based Exchange Traded Fund (ETF) would be approved, the FSA recently stated that they are not currently considering approving it. Still, it is likely that the prior attraction to allowing the ETF will resume as time continues to pass on. Bloomberg even reported that Japan may approve “exchange-traded funds that track the asset class” and is currently gauging industry interest.

Continued Growth

Regardless of ETF approval, companies continue to invest heavily in cryptocurrency and blockchain within Japan. There were an estimated 200 companies at the end of 2018 awaiting regulatory approval. Coinbase is currently seeking a license to operate within the country, while Yahoo Japan purchased the exchange BitARG with the intention of operating an exchange of its own. Meanwhile, Huobi purchased their licensed Japanese counterpart, BitTrade, to expand within the country.

Adoption Far Beyond Exchanges

The Japanese investment in cryptoassets extends well beyond exchanges. For example, the highly popular messaging app, LINE, launched its own blockchain, giving tokens to its users for using the DApps running on the network. This followed a prior launch of a $10m fund by the firm, aimed at developing crypto products.

There are also plans in place by Japanese banks to launch cryptocurrencies to act as stablecoins pegged to the Yen. Mizuho Bank and Mitsubishi UFJ Financial Group have both announced their intentions to do so.

Mitsubishi is currently running a trial in Tokyo. If successful, later trials could involve up to 100,000 customers in 2019

Mizuho has also been running a pilot in the Fukushima Prefecture since June of last year that is expected to be unveiled nationally in March of 2019 with the support of 60 regional banks

The Early Adopter Nation

Although regulation has arguably tightened in Japan over the years, there is no doubt that the country remains an important source of users and capital for crypto related endeavors. The entrance of large financial institutions such as Mizuho and Mitsubishi is unsurprising as the demand for digital money is particularly large in Japan.

Yet unlike many other developed nations, the country remains a large user of cash. Therefore, it may find itself skipping the contactless credit/debit card payments, diving right into a cryptocurrency QR code fueled payment system. Regardless, the continued importance of Japan to the crypto space is unlikely to end any time soon.