Bitcoin operators are keenly watching the Diet as it deliberates bills to regulate the currency, believing the legislation is key to regaining the public trust’s in the virtual tender and luring more players to the industry.
The bitcoin phenomenon fell under a cloud following the 2014 bankruptcy of Mt. Gox, a bitcoin exchange that claimed $390 million worth of the virtual currency disappeared from its computer system. Users lost their bitcoins and the firm’s CEO, Mark Karpeles, was arrested last year for allegedly falsifying data.
Learning from the bitter experience, the government is set to place bitcoin operators under its supervision. At the same time, it will recognize the digital currency as similar to money, setting a legal definition for the first time once the bills pass the Diet and take effect.
The bills passed the Lower House last month and are currently under deliberation in the Upper House.
As fintech, a term coined by combining “finance” and “technology,” flourished worldwide, Japan wanted to keep up with the trend by creating legislation to cover bitcoins.
“This is epoch-making,” said Mike Kayamori, CEO of Quoine, a Tokyo-based bitcoin exchange, adding that Japan was at the forefront globally of trying to establish legal definitions around bitcoin trade.
Approved by the Cabinet in March, the bills to revise laws including the Banking Act and Payment Service Act stipulate that virtual currencies have “asset-like values” that can be used in making payments and can be transferred digitally.
The legislation also obliges bitcoin business exchanges to comply with various regulations — something nonexistent when the Mt. Gox fiasco took place — and the Financial Services Agency is expected to become the industry’s watchdog.
As such, the new regulation will require bitcoin exchanges to register with the government and submit annual reports. When necessary, the FSA will be able to conduct an on-site inspection and issue business improvement orders.
To prevent the virtual currency from being used for money laundering and terrorism, operators will also be obliged to confirm the identity of users when they open accounts.
Yuzo Kano, CEO of Tokyo-based startup bitFlyer, which also runs a bitcoin exchange, said he believed a key point in the legislation was that it protected bitcoin users.
“It will help improve the trust in the virtual currency,” he said.
He said without the bills, users would distrust the entire system because it was not recognized by the government.
“I am hoping the new rules will stimulate the growth of the industry,” he said.
Bitcoin — a decentralized cryptocurrency launched in 2009 — is used in transactions via a peer-to-peer network that connects users’ computers directly instead of via a main server, enabling users to transfer small amounts of the virtual currency almost free of charge.
Its core technology, blockchain, a public ledger that logs every transaction and is considered impervious to fraud, has been touted as revolutionary, since it achieves a legitimate currency system without a central authority, such as a bank or government.
Once the new regulations are in place, industry officials hope bitcoins will be seen as a legitimate currency that will attract more new players.
After their mandatory registration, bitcoin business operators will gain a “significant level of trust” that will make it easier to work with other firms, especially with conservative Japanese banks, said Kayamori, who is also a former senior vice president of SoftBank Group in charge of its Asia operations.
The key to running financial services is to cooperate with banks, because they provide corporate accounts, he added.
“The business-to-business field will really grow and various applications will be available to consumers, such as a payment method,” he said.
Kano of bitFlyer agreed, saying the system needed to attract major Japanese companies for it to spread because most bitcoin companies were currently startups.
Although it has been growing, the Japanese bitcoin market is still in its infancy and too small for many startups to compete, so “nobody is really making a profit,” said Kano.
“It’s essential for big firms to enter the market, especially major payment and commerce firms,” he said.
Bitflyer users increased to 150,000 in March, up from 100,000 in January, with most users in Japan. Quoine, whose exchange service is used in other parts of Asia, said trade volume in March was ¥12 billion, a 200-fold jump from the same month a year ago.
“The market itself has been growing, so I’m hoping everyone will be happy someday,” Kano said.
Kayamori of Quoine said he believed bitcoins had great potential to spread in Japan for two main reasons — the popularity of foreign exchange and widespread loyalty programs.
After the new rules take effect, existing financial institutions will probably start offering investment options for the virtual currency, said Kayamori.
He added that investing in virtual currencies was similar to foreign exchange trade, so bitcoins could be a popular investment option.
One setback, though, could be that bitcoin is known as a volatile investment tool. In November 2013 it traded at about $1,200 per bitcoin, but this is now about $450.
Another positive factor, Kayamori pointed out, is that Japan had a variety of widespread loyalty programs, including T-point and Ponta cards.
The virtual currency, which can be used to make payments not only in Japan but also to participating stores overseas, could be an option to convert those loyalty points, he said.
In Japan, more and more shops are accepting bitcoins.
According to Coincheck, another Tokyo-based startup that provides an exchange service and bitcoin payment system, there are over 1,000 such stores now.
Kayamori said Quoine had talked to loyalty program operators who have shown interest.
But they are currently reluctant because accounting procedures and the legal status of the virtual currency remain unclear.
“They are literally waiting” for the rules to be in place, said Kayamori.