Cryptocurrencies are experiencing a frothiness reminiscent of the dot-com bubble, with bitcoin exhibiting more volatility in the last month than did U.S. equities on Black Monday in 1987, Black Tuesday in 1929 and the Great Recession of 2008. This volatility comes as virtual currencies assume a new prominence in business and finance, raising important questions about their role, viability and regulation. Japan can play an important role in answering these questions as it is the largest trading market for bitcoin.

Cryptocurrencies are digital currencies that use cryptography to create assets, account for them and secure their exchange. Typically, the currency — bitcoin is the most popular, but there are over 1,370 — is both a currency and a payment network. No single authority is in charge of the currency or the network. Instead, it is a peer-to-peer network that distributes a transaction ledger among its participants. This ledger is called the blockchain, and transactions occur when all the computers in the network “agree” that an event has taken place. Since these currencies are distributed and there is no single guarantor of value, their worth floats in relation to conventional currencies, like the yen, the dollar or the euro. The “owner” of a digital currency has a code that allows him or her to redeem the currency.

One analysis has concluded that in 2017, 2.9 million to 5.8 million unique users had a cryptocurrency wallet, most of them using bitcoin. In December, total market capitalization of cryptocurrencies is estimated to exceed $600 billion with daily trade volumes surpassing $50 billion. Major financial institutions like JPMorgan and Goldman Sachs are reportedly setting up or considering establishing cryptocurrency trading desks.

Many bitcoin holders and investors believe that the currency is becoming a mainstream asset, sparking debate among international financial authorities about the need for concerted action to regulate the market. French Finance Minister Bruno Le Maire called for the Group of 20 to take up the issue at the group’s next summit. Yet skeptics persist, such as Japan’s Finance Minister Taro Aso, who believes that bitcoin has not yet proved to be “a credible currency.”

Aso’s skepticism is curious given the growing popularity of cryptocurrencies in Japan and the government’s response. On April 1, bitcoin was officially recognized as a legal payment method, a move that provided for Financial Service Agency oversight of cryptocurrency exchanges. An extensive approval process was set up to prevent the fraud that occurred in previously unregulated exchanges such as Mt. Gox, which collapsed in 2014. In September, the FSA approved 11 companies to operate cryptocurrency exchanges and another 17 applications are under review. The Tokyo Financial Exchange announced that it will begin preparations for trading bitcoin futures at the beginning of 2018. One company, GMO Internet, has said it will start offering employees a portion of their salaries in bitcoin next year as well. As a result, Japan’s has become the world’s largest bitcoin market, accounting for over 61 percent of global trades, or twice the trading volume of the United States.

Cryptocurrencies are also popular in South Korea, with an increasing number of companies both investing in digital currencies companies and the related infrastructure. The result has been explosive growth in demand. China had a big presence in this field, but authorities there banned bitcoin in a move to better control financial transactions. That move prompted a migration of traders to Japan, contributing to this country’s prominence in the international cryptocurrency market.

While Beijing is most concerned with how digital currencies undercut its ability to control the economy, governments are right to worry about the dangers of unregulated cryptocurrency markets. One concern is use to finance illegal activities. Cryptocurrencies are a popular form of finance on “darknets” where illegal transactions occur. There are others who wish “only” to evade taxes or launder money. Then there is the prospect of fraud or theft. There have been several notable collapses of currency exchanges — Mt. Gox declared bankruptcy in 2014 after announcing the loss of an estimated 7 percent of the world’s bitcoins. The U.S. Department of Homeland Security found that one-third of bitcoin exchanges were hacked between 2009 and 2015.

There is also the possibility of market manipulation. There have been four bitcoin booms since the currency was introduced, and prices can oscillate as much as 80 percent in days. Volatility is an issue not only for the currency but also for enterprises that seek to exploit the buzz. One New York tea manufacturer’s share price soared 289 percent after it rebranded itself Long Blockchain Corp. Those dangers demand regulatory scrutiny to protect investors and law-abiding citizens. Japan, with its leading role in cryptocurrency markets, should be leading the way.

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