Crime involving cryptocurrencies appears to be on the rise at a time when the total number of reported crimes in Japan is falling.

The theft of 523 million NEM coins from Tokyo-based cryptocurrency exchange Coincheck Inc. on Jan. 26 has brought this issue to a head in recent weeks, with the company claiming to have lost a total of ¥58 billion in the heist.

The theft will have the knock-on effect of lowering public trust in virtual currencies, and it’s worth noting that the country’s Financial Services Agency (FSA) had warned Coincheck to address security concerns regarding the way it manages customer assets before the event.

Japan has been central to the establishment of virtual currencies exchanges worldwide. An unknown person (or persons) named Satoshi Nakamoto created Bitcoin, while Tokyo was home to the first major bitcoin exchange, Mt. Gox, which also collapsed after losing nearly ¥50 billion worth of virtual currency in 2014.

The government recognized bitcoin as legal tender in April 2017 and the FSA now recognizes 16 companies as registered virtual currency exchanges. (Coincheck wasn’t among those listed.)

More than 30 percent of the world’s bitcoin trade volume is conducted in yen, according to a report on TBS last month.

On Jan. 12, a cryptocurrency themed idol group — the Virtual Currency Girls — made its debut.

On the surface, therefore, it looks as if Japan loves cryptocurrencies. However, the virtual currency world also has a seedy side to it, as has quickly become clear.

Last year, the Metropolitan Police Department arrested the founder of a firm operating Ripple, a lightning-fast virtual currency exchange, for allegedly defrauding a client of around $12,000.

Meanwhile, computer viruses loaded with ransomware target people searching for cryptocurrencies. Users who fall for this kind of scam find their computers to be infected and they must pay the creator of the virus in virtual currency to recover their data.

The latest scam to attract the attention of the Japanese authorities involves initial coin offerings (ICOs). An ICO is essentially a form of crowdfunding centered around a cryptocurrency that can be a source of capital for startup firms. In the ICO, some set quantity of the crowdfunded cryptocurrency is pre-allocated to investors in the form of “tokens.” Those tokens may later become actual units of currency if or when the ICO’s funding goal is met and the virtual currency is launched.

On Oct. 27, the FSA presciently issued an advisory warning to users and business operators about the risks of such enterprises. The FSA warns investors that digital tokens issued in an ICO are subject to rapid price fluctuations and that there is a huge potential for fraud. For example, the price of a token may decline or lose all value rapidly. It also notes that depending on the scheme of the ICO, the firm handling them may be required to register with the government.

At this point, however, ICOs are still basically operating in unknown territory in Japan. No one is quite sure how to regulate them. Consumers are warned to proceed at their own risk.

Meanwhile, Facebook announced on Jan. 30 that it would no longer allow ads for ICOs to appear on its pages. Facebook Product Management Director Rob Leathern wrote in a blog post that the social media service would unilaterally prohibit ads that promote ICOs and others “that are frequently associated with misleading or deceptive promotional practices.”

On Jan. 25, the U.S. Securities and Exchange Commission, which functions like the FSA in Japan, filed a court order halting an allegedly fraudulent ICO that targeted retail investors to fund what was supposed to be the world’s first “decentralized bank.” The ICO had already collected nearly $600 million. It represents the start of a serious crackdown.

Japan may do this in the near future but, for now at least, consumers are on their own. And there’s genuine concern here: An investment in virtual currency can cost naive consumers cold hard cash.

Dark Side of the Rising Sun is a monthly column that takes a behind-the-scenes look at news in Japan.

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