Japan cryptocurrency crackdown

Japan cryptocurrency crackdown
Japan’s regulatory body the Financial Services Agency ordered Tokyo-based cryptocurrency platforms FSHO and Bit station to close operations for a month. The agency..

Japan’s regulatory body, the Financial Services Agency ordered Tokyo-based cryptocurrency platforms FSHO and Bit station to close operations for a month. The agency conducted checks on money laundering and customer protection. This move is part of a broader trend towards the regulation of cryptocurrencies.

Background

Cryptocurrency is a form of digital money that is designed to stay secure. Classified as a subset of digital currencies, it uses cryptography to secure its exchanges, making it nearly impossible to counterfeit. Cryptocurrency is decentralised through a blockchain (a public transaction database). 

Bitcoin, created in 2009, is a cryptocurrency and digital payment system. It is community-run and often referred to as the first “start-up currency”. It is one of the most popular cryptocurrencies in the world.

Cryptocurrencies have rapidly grown in popularity. By the beginning of 2015, 100,000 merchants and vendors accepted Bitcoins as payment. In the final months of 2017, the value of Bitcoins began to rise exponentially along with other cryptocurrencies. At one point it was trading at $20,000, thus sparking a slew of warnings from experts and analysts. Other cryptocurrencies like Ripple and Dogecoin have also performed well in the past year.

Critics have argued that digital cash systems are volatile and speculative in nature and come with a number of inherent risks. Experts have noted that the craze around Bitcoins and other cryptocurrencies might be a bubble. James Dimon, Chairman, President and Chief Executive of JPMorgan Chase said, “It's just not a real thing, eventually it will be closed. I'm not saying 'go short bitcoin and sell $100,000 of bitcoin before it goes down. This is not advice of what to do… It won't end well. Someone is going to get killed. Currencies have legal support. It will blow up.”

Governments too have begun talking about the cryptocurrencies. The Reserve Bank of India issued two warnings regarding Bitcoins in 2017. In September 2017, China called a freeze on all fundraising through Initial Coin Offerings (ICOs). The country closed exchanges and issued statements to its three major cryptocurrency exchanges (OKCoin, Huobi, and BTC Chine) to shut down trading.

Analysis

On Thursday, Japan’s Financial Services Agency (FSA) ordered two major cryptocurrency platforms to halt operations “for at least a month”. According to the regulatory agency, the first of these platforms, Bitstation, has used customer funds for personal transactions. FSHO, the second exchange, was accused of inadequate customer protection.

The FSA has also imposed a fine on four other cryptocurrency exchanges for less than optimal operation. One of the platforms under scrutiny is Coincheck, which fell victim to a hack that resulted in the loss of approximately $530 million in January. This is reportedly the largest cryptocurrency theft so far.

As of 2017, Japan became the first country in the world to regulate cryptocurrency exchange. It has embraced the use of digital currency. 16 exchanges are formally registered with Japanese authorities. The FSA has issued broad directives for Japanese exchanges to boost security systems, and for anti-money laundering measures. On Thursday, Coincheck said that it would compensate customers who lost money in the January hack.

Other countries have also increasingly begun to address issues related to cryptocurrency. This year alone, Seoul and Beijing announced anti-cryptocurrency measures. In January 2018, all cryptocurrency exchanges were banned in South Korea, one of the most active markets in the world. The South Korean government issued this ban after the nation’s exchanges were affected by a number of cyber breaches.

In February 2018, China announced that it would block all websites related to cryptocurrency trading and ICOs “to prevent financial risks”. Earlier this month, two Indian cryptocurrency platforms, BTCXIndia and ETHEXIndia, reportedly halted trading due to fear of regulation from the government.

Concerns that Bitcoins are regularly used in black market trade online are also growing. The United States, the United Kingdom, and the International Monetary Fund have all expressed concerns regarding the illegal use of cryptocurrencies.

On Wednesday, the United States Securities and Exchange Commission released a statement on “potentially unlawful online platforms for trading digital assets”. The statement ordered “platforms serving as venues for digital assets” to register with the national agency.

Earlier this month, the head of the International Monetary Fund Christine Lagarde said that cryptocurrency regulation is “inevitable”. “It’s clearly a domain where we need international regulation and proper supervision,” she told CNNMoney.

Assessment

Our assessment is that governments are increasingly concerned with the regulation of cryptocurrency platforms. Bitcoin values remain relatively volatile, and it is unlikely that cryptocurrency markets will stabilise without formal structures and systems. We believe that regulation is essential to increase the safety and reliability of these markets. As stated previously, we also believe that Blockchain technology may soon be considered as hard currency in the future.  

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