The country’s financial watchdog plans to impose stricter regulations on bitcoin and other cryptocurrencies in the wake of the massive theft at Coincheck Inc., a Tokyo-based virtual currency exchange operator, in January and the use of such digital money for speculative investments.
In April 2017, Japan revised the Payment Services Act to protect cryptocurrency users, introducing a registration system for dealers who exchange them with yen and other legal tender. The revision assumed wider use of cryptocurrencies for payments and remittances.
But speculative investment in cryptocurrencies increased steeply due to sharp rises in their value, making it essential for the Financial Services Agency to create regulations that respond to the situation.
With cryptocurrency prices skyrocketing, bitcoin, the most dominant cryptocurrency, temporarily saw its price soar above ¥2 million ($17,700) in December 2017 from below ¥200,000 earlier that spring. Although the price has plunged since then, it is still trading above ¥750,000 this week.
In Japan, transactions involving five major virtual currencies totaled ¥69 trillion in fiscal 2017, roughly 20 times the level of the previous year, with the number of cryptocurrency users reaching 3.5 million.
But the use of digital currencies for payments as alternatives to legal tender is limited and most transactions are aimed at capitalizing on price gains.
“Young users who had previously no connection (with cryptocurrencies) have increased at a breathless pace,” a senior official of a major exchange operator said.
The rapid growth of investments in cryptocurrencies can be attributed to an expansion of margin trading, in which investors with little capital could earn huge profits, or sustain massive losses, by borrowing money. While foreign exchange margin trading has a 25 times leverage limit, the absence of such a cap on cryptocurrency margin trading makes it possible for investors to experience wild financial swings, an exchange official noted.
As virtual currencies are outside the Financial Instruments and Exchange Act, which sets out anti-insider trading and other regulations, trading in them is “unchecked,” an FSA official said.
The FSA has focused its regulatory regime on electronic settlements, putting into force the Payment Services Act in 2010 to deal with integrated circuit cards issued by transport service operators, including East Japan Railway Co’s Suica card.
The legal revision in 2017 was designed to prepare for a sharp increase in online payments by means of digital currencies, due to concerns that regulations governing individual financial sectors, such as banks and brokerage houses, may not be relevant.
The agency devised the minimum necessary legal framework in order to “prevent a situation in which there is no law governing (cryptocurrencies) when they come into wide use,” a senior FSA official said.
But the use of virtual currencies has spread rapidly toward speculative investments rather than payments, contrary to the FSA’s expectations. In addition, digital currencies are now finding their way into corporate fundraising.
The cryptocurrency theft involving Coincheck exposed the sloppy management of customer assets by exchange operators.
In April, the FSA set up a panel of experts to discuss ways to close the gaps between regulations and actual practice for cryptocurrencies.
“Virtual currencies should be positioned as assets for investment, while a legal system to protect investors needs to be established as a matter of urgency,” an expert said.