Bitcoin regulation in Japan: How a new regulatory framework could be a catalyst for cryptocurrencies

Cryptopunks packing up hard drives will never be as dramatic as smartly dressed bankers arriving on Wall Street with their belongings boxes and office art, but the collapse of bitcoin exchange Mt Gox in 2014 is widely considered to be the digital currency’s “Lehman Brothers” moment.

The Tokyo-based bitcoin exchange, which once accounted for 70% of the world's bitcoin trading volume, eventually ended up suspending trading and being liquidated, with assets worth nearly $450 million disappearing. Earlier this month, Japan officially enacted legislation to protect bitcoin users from the sting of another exchange collapse, while also requiring bitcoin exchanges to comply with anti-money laundering regulations and officially listing bitcoin as a legal payment method.

In the U.K., where the legal status of cryptocurrencies is murky, Japan’s move could serve as a framework and catalyst for bitcoin’s widespread adoption.

Professor Cathy Mulligan, co-director of the Cryptocurrency and Research Center at Imperial College London, believes that the lack of regulation may be hindering the development of startups and financial technology, and it is better to create development opportunities by reducing regulatory constraints. He said:

“What’s happening in the UK right now is that a lot of startups are asking regulators to clarify, ‘How are we going to be regulated?’ rather than regulators helping these companies clarify regulation.

“Bitcoin is effectively considered private property in the UK. If you try to trade Bitcoin for pounds, you won’t be charged VAT. But the European Commission is taxing Bitcoin.”

From a UK perspective, we don’t see a lot of regulation around Bitcoin. Regulators aren’t being forced to implement AML or KYC regulations. I think what’s happening in Japan will see a lot of startups come to the country because the business environment is stable and you know how to regulate it.”

A research report released last week by the Cambridge Center for Alternative Finance, which collected data from more than 100 cryptocurrency companies, estimated that the number of active cryptocurrency users worldwide has reached 5.8 million, with Bitcoin accounting for 72% of the market.

It is difficult to figure out how big the cryptocurrency market is in the UK because of the privacy of Bitcoin. However, according to a report released by the Bank of England in 2014, the volume of Bitcoin transactions in British pounds only accounted for 1.2% of the total Bitcoin transactions. However, Bitcoin trading platform Coinbase said that recently, the number of British users has increased fivefold year-on-year.

Eitan Jankelewitz, an attorney at Sheridans, a law firm specializing in blockchain and e-commerce, said:

“Europol is not a fan of the anonymity of Bitcoin and we think there is some misunderstanding about that because Bitcoin is not really anonymous.”

“You can track every bitcoin transaction, you can see where every penny goes, you can see where the bitcoin has been. The problem is you don’t know who controls the wallet that holds the bitcoin.”

Part of the reason for regulating Bitcoin as a currency or commodity is that governments are unable to define what Bitcoin is.

Dr. Mulligan said:

“Some countries, like the UK, are treating Bitcoin as a commodity. Others are treating Bitcoin as a currency, and some are treating Bitcoin as an unknown commodity, which changes the way we tax it.”

The cryptocurrency appears to straddle the line between commodity and currency. It can be used to buy food from food stalls in Camden Market and drinks in East London pubs, but at the same time Bitcoin is finite and can be traded like a commodity. Bitcoin's wild volatility also makes it difficult to use as an everyday currency (Bitcoin prices have fluctuated between $776 and $1,291 this year).

Jankelewitz, whose law firm has begun accepting Bitcoin as payment for its services, said:

“The harsh truth is that Bitcoin as a currency is not going to work in the UK, and perhaps globally. People usually buy Bitcoin because they think it has the potential to appreciate in value in the long term, or they just like the volatility and decide to trade it like gold.”

Bob Swarup, author of Money Mania and principal of Camdor Global Advisors, said:

“If Bitcoin is going to be a valid currency with broad appeal, it really needs to grow, grow, grow in the monetary space, and that means it needs to be subject to state and regulatory influence to some degree. People are holding up Bitcoin as the messiah, like the second coming of monetary Jesus. They’re like Trekkies.”

Swarup said Brexit presents an opportunity for the U.K. to become a cryptocurrency hub if it is interested in positioning itself as an innovation economy.

However, Bitcoin’s appeal may be even stronger in emerging markets.

For example, Bitcoin has become a safe haven asset in Venezuela, which is struggling with a slump in its oil industry, which accounts for 90% of the country's exports. The opposition-controlled National Assembly estimates that Venezuela's inflation rate has reached 741%, while the International Monetary Fund believes it will reach 1,600% this year. Bitcoin means that Venezuelans only need an internet connection to have access to a more reliable form of money.

According to Surbitcoin, the largest bitcoin exchange in Venezuela, the number of bitcoin users in the country has skyrocketed from three digits in 2014 to more than 85,000 at the end of last year, and some companies have begun to accept only bitcoin payments.

Swarup also compared Bitcoin’s search for legitimacy to the 12th century tally sticks. In 1100, Henry I decided that tally sticks could be used as currency to pay taxes, with a notch in the wood representing a payment. The demand for tally sticks quickly soared because it was given legitimacy.

Swarup believes that if Japan’s adoption of Bitcoin spreads globally, the same experience with the account stick will happen to Bitcoin.

He believes:

“When the government sanctions, a wider range of people will find Bitcoin interesting.”

Widespread use of Bitcoin has already begun in Japan.

AirRegi, a tablet payment provider that covers 260,000 Japanese food stores and retailers, has said it will accept bitcoin payments. Major Japanese retailers Bic Camera and Recruit Lifestyle have also outlined similar plans.

Despite the breakthrough in Japan, Bitcoin still faces challenges in other regions.

Last month, the U.S. Securities and Exchange Commission rejected the Winklevoss brothers' application for a bitcoin ETF. Meanwhile, the bitcoin community is divided over the future of bitcoin, and security and theft are also issues.

However, Professor Swarup said:

“Many people within the Bank of England and other policymakers are discussing whether money will eventually become digital, so a digital pound would immediately be competitive with bitcoin or other digital currencies.”

“If governments fail to stay at the forefront of developments, they will find themselves being swept away by the tide of developments. In fact, Japan has already created a framework for every digital currency.”