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With investors around the world fueling another crypto asset boom since late last year, elevating the values of digital currencies such as bitcoin, Japanese players in the space are hopeful that the country will be able to advance to the next stage after undergoing a period of scrutiny and renewal.

Perhaps, the most symbolic indication of the local industry’s progress is the steady growth recorded by Coincheck Inc., which is now under Monex Group Inc., an online brokerage.

A hacking attack that hit Coincheck in January 2018 put a wet blanket on a growing cryptocurrency frenzy. In the aftermath of the massive cryptocurrency heist, which saw ¥58 billion worth of NEM coins taken from the Tokyo-based startup, Japan’s cryptocurrency market appeared to have lost vigor amid an intensified crackdown on virtual currency exchange operators by the country’s financial watchdog.

According to fiscal 2020 earnings released by Monex Group last month, Coincheck’s revenue jumped by more than fivefold to ¥20.8 billion compared with the previous year. Of the 260,000 users that it gained, about 210,000 were concentrated in the second half of the business year that ended in March, indicating that many users have hopped on the latest crypto bandwagon.

When Coincheck was hit by the cyberattack, the firm was criticized for neglecting consumer protection amid its sharp growth. That incident highlighted the fact that many exchange operators, which were startups, did not have experience and know-how in properly running online-based financial services, prompting the government to issue a series of reprimands, some of which even ordered the suspension of operations.

“Due to our hacking problem, not only us but each Japanese cryptocurrency exchange had to strengthen measures to protect customers” and prevent cyberattacks, money laundering and other inappropriate transactions, said Yusuke Otsuka, an executive officer and co-founder of Coincheck.

While operators were busy with living up to the standards demanded by the Financial Services Agency, the domestic crypto scene was going through a low-key phase.

But Coincheck seems more confident this time of navigating another crypto boom, saying it has managed to rebuild and reinforce its management system by joining Monex Group.

Founded in 1999, Monex was one of the pioneers of the online brokerage business in Japan, giving it experience and know-how in running online-based financial services, which Coincheck did not have.

Before teaming up with Monex, the business operation heavily depended on the two founders, Otsuka and former CEO Koichiro Wada, but the firm now has a stronger management team.

“The organization has become much more mature. We can make speedy decisions with effective governance in place,” said Otsuka.

Coincheck Inc. executive Yusuke Otsuka (right) attends a news conference along with then-CEO Koichiro Wada (second from right) and Monex Group Inc. executives in Tokyo in April 2018 to announce the acquisition of Coincheck by Monex. | BLOOMBERG
Coincheck Inc. executive Yusuke Otsuka (right) attends a news conference along with then-CEO Koichiro Wada (second from right) and Monex Group Inc. executives in Tokyo in April 2018 to announce the acquisition of Coincheck by Monex. | BLOOMBERG

Although Japan’s cryptocurrency businesses feel they are better prepared for another wave in the digital currencies, whether they will really take root in the country is another issue.

Their counterparts overseas, especially the United States, have become more vibrant, with new services such as crypto banking emerging to offer more than simply trading virtual currencies. Japanese businesses are now gearing up to introduce new services in an effort to widen the use of digital currencies as well.

Tokyo-based Fintertech Co., which is under major brokerage Daiwa Securities Group Inc., runs a loan service based on crypto assets used as collateral, and it said its business has benefitted from the recent trend.

The firm launched its business about a year ago, mainly targeting startups that were investing in cryptocurrencies.

Those investors don’t intend to sell their crypto assets yet, since they believe that their values will continue to rise. At the same time, they also want to somehow utilize the swelling values for their businesses.

In response, Fintertech started its loan services that allow borrowers to use their virtual currencies as collateral.

“Our clients are happy with our services because they can take advantage of their crypto assets to improve the efficiency of capital,” said Kazuya Aihara, who leads the firm’s digital asset group.

He added that the sharp increase in the value of cryptocurrencies over the past several months has been driving the business, prompting clients to borrow more money.

“Since the value of their collateral has gone up, they can borrow more without adding more collateral,” he said.

Aihara added that this business model harnesses know-how regarding the securities-based loans that Daiwa Securities had already been offering. Daiwa has established trust within the financial industry, so clients know that they are not dealing with an amateur firm.

For cryptocurrencies to take root, they need to be more integrated into financial services, Aihara said.

In Japan, cryptocurrencies are not officially recognized as financial assets, but “by accepting crypto assets as collateral, more people will start seeing them as financial assets. We’d like to accelerate this trend,” Aihara said. And now that the Japan’s crypto scene is emerging from its period of regulatory scrutiny, “I think Japan is finally ready to launch various new crypto-asset related services.”

The participation of institutional investors is key to market growth from now on, industry players said.

The U.S. has seen more institutional investors and large corporations, such as Third Point LLC, Tesla Inc. and Square Inc., jumping into the market, which has pushed up cryptocurrency values further, especially over the past six months or so.

The listing of Coinbase Global Inc., the largest cryptocurrency exchange in the U.S., on NASDAQ last month also highlighted the current boom, with its valuation reaching over $85 billion (¥9.25 trillion) in its debut.

The recent climb in value has brought an uplift to Japan’s cryptocurrency market and related businesses, but the participation of institutional investors and big corporations is still growing slowly. Although Coincheck has enjoyed a surge in its number of users, they are mostly individual investors. The reluctance of institutional investors to get involved partly stems from a number of uncertainties, such as those related to taxation and accounting, and consequently big Japanese investors appear to be taking a wait-and-see approach.

“U.S. and Japanese institutional investors are quite different,” said Otsuka. “Major Japanese institutional investors tend to seek stable returns. The U.S. has more investors, such as hedge funds, willing to take risks.”

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