The government is weighing the legal regulation of virtual currencies such as bitcoins as suspicions widen over the alleged criminal activities of the arrested founder of what used to be the world’s largest exchange of bitcoins and as international calls grow for tightening control of cybermoney due to the risk of their abuse for money laundering and terrorist financing. The planned regulations should aim to protect users of virtual currencies, which are increasingly popular both in Japan and overseas due to their convenience as tools for fund transfers and financial settlement. Rules and systems to ensure safety and transparency of cyber currency transactions should in turn enhance their reliability and serve to promote their potential.

Following this month’s arrest of Mark Karpeles, founder and chief executive officer of the bankrupt Tokyo-based firm Mt. Gox, Finance Minister Taro Aso said the government would consider new regulations on virtual currencies such as the introduction of a registration or license system for operators of cybermoney exchanges. The Finance Ministry, the Financial Services Agency and the National Police Agency are expected to work with other relevant authorities to amend the anti-money laundering law and possibly the law on transaction in financial products, with a view to submitting related bills to the regular Diet session next year.

Virtual currencies such as the bitcoin are traded with real currencies like the yen and the U.S. dollar at exchanges in cyberspace. They are generated by complex chains of interactions among computer networks, but are not backed by any government or central bank. The cyber currencies have become popular due to their much lower transactions fees in money transfers and financial settlements compared to bank transactions and credit card settlements, as well as the convenience of year-round 24-hour service. The number of domestic bitcoin users has reportedly continued to increase even after the bankruptcy last year of Mt. Gox, which once boasted of handling about 80 percent of bitcoin transactions worldwide, and is now estimated at 20,000 to 30,000 people.

Mt. Gox, founded by Karpeles in 2011, abruptly shut down all transaction of the virtual currency in February 2014 and filed for court protection from creditors, claiming that it had lost bitcoins worth about ¥48 billion and ¥2.8 billion in funds entrusted to it by his clients when the exchange’s computer system was hacked. According to media reports, Mt. Gox incurred heavy losses in the previous year as large numbers of clients withdrew money following the seizure of its bank accounts in America by U.S. authorities.

Karpeles was arrested Aug. 1 on suspicion that he manipulated computer data to pad the outstanding balance of his dollar account within the bitcoin exchange by $1 million in 2013. On Friday, he was served an additional warrant on suspicion of embezzling ¥312 million in clients’ cash held in the company’s bank account. Mt. Gox reportedly kept the company’s money and its clients’ funds in the same bank account, and investigators suspect that the cash the CEO used after the firm’s debts exceeded assets in 2013 belonged to clients.

The collapse of Mt. Gox and the criminal probe into the company’s operation highlight the need to protect the users of virtual currencies by ensuring that transactions are transparent and safe. Japan now has no laws regulating virtual currencies. In a March 2014 Cabinet decision, the government took a position that the bitcoin is a “noncurrency” market product like precious metals, and not covered by financial regulations.

Calls for regulating the virtual currencies have also been growing internationally due to concerns that difficulties in tracking down the funds converted into cybermoney make the digital currency a hotbed for money laundering, financing for terrorist groups and other criminal activities.

The government is exploring new regulations on virtual currencies in response to a report in June by the Financial Action Task Force, an international anti-money laundering and terrorist funding watchdog, which called for closer monitoring of cyber currency exchanges. The FATF’s “Guidance for a risk-based approach to virtual currencies” recommended that all exchanges be registered and licensed so that they would be subject to the same kinds of scrutiny as other financial services and money transfer businesses, and urged governments to require operators of cybermoney exchanges to confirm the identity of clients, keep digital records of transactions and report any suspicious transactions to authorities.

Some countries are starting to impose regulations on virtually currencies. According to the FSA, last year the U.S. Treasury Department added operators of bitcoin exchanges as subject to control under anti-money laundering regulations, and New York State financial authorities are considering the introduction of licenses for cybermoney exchanges. Germany has reportedly put virtual currency transactions under the regulations of its banking law. China banned the handling of virtual currencies by financial institutions late last year, and Russia in February declared the use of cyber currencies illegal.

The government will need to coordinate its planned regulations with other countries’ moves. Along with preventing the abuse of the virtual currency transactions for money laundering and criminal purposes, the regulations should aim to protect the interests of cybermoney users.

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