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As Japan prepares to enforce a bill that mandates the regulation of bitcoin and virtual currency exchanges in the country, it raises the question as to whether this will do more damage to the bitcoin/blockchain space like what the BitLicense has done to New York?

In a recent blog, Koji Higashi, co-founder of bitcoin and crypto platform IndieSqaure, said that he had serious doubts about the law bringing long-term benefits to the Japanese community, going so far as to say that it could ‘set a bad precedent.’

Yet, bitcoin has had a bad reputation, particularly in Japan, following the fiasco of the now-defunct bitcoin exchange Mt. Gox, which collapsed in 2014. To regulate the digital currency the Japanese government stepped in seeking to establish guidelines.

However, it was in February 2016 that the Japanese Financial Services Agency (FSA) proposed considering and treating virtual currencies as methods of payment and settlement like fiat currencies. A month later, Japan’s cabinet passed a set of bills deeming digital currencies as similar to fiat money.

Now with Japan’s legislature passing a bill for the regulation of bitcoin and virtual currency exchanges, the exchanges will need to register with the FSA and follow know-your-customer (KYC) and anti-money laundering (AML) practices. It’s apparent that the country is keen to crack down on scams involving digital currencies and to protect consumers. It could also be beneficial to bigger corporations who are seeking clarity on digital currency regulations and are looking to enter the market.

Yet, in his post, Higashi is doubtful as to how effective the new law will be against scams.

Speaking to CCN, Higashi said scammers will always find ways to avoid regulation and scam people.

He added:

The thing is this law will make it clear which currencies are safe, but those who have been scammed get scammed not because they don’t know the difference, but mostly because of their greed of which scammers take advantage.

Japan’s High Regulation Cost

The proposed cost to comply with the new law is another factor that is raising eyebrows. Like the BitLicense, if you are considered a virtual currency trading business, you will be required to submit copious amounts of paperwork and follow strict procedures.

To comply with Japan’s new regulation, a virtual currency trading business will need to reserve capital worth more than approximately USD$100,000 compared to the BitLicense’s $5,000 application fee.

There are concerns that Japan’s new bitcoin industry regulation could prove more restrictive than New York’s BitLicense.

On top of that each company will need to submit a three-year business plan, provide a detailed report on their organizational structure, join the government appointment industry association, implement an internal program for compliance and virtual currency management, comply with KYC/AML requirements, and gather customer information from all users even if it’s as little as $1 worth of trading.

According to Higashi, to meet the condition above and become properly registered it is estimated to cost between USD$300,000-500,000.

He said:

It’s hard to say whether the regulation in Japan is costlier than the BitLicense, but I can say it’s expensive enough to put serious financial pressure on startups and may force them to go out of business.

Difference from BitLicense

The law is complex, but there are two points that Higashi points out that could hinder innovation in Japan, setting the bitcoin/blockchain space back in the long-term.

These are:

  1. Only approved virtual currencies by the authority are considered legitimate and can be traded, sold or promoted to public
  2. Regulation applies to non-custodial businesses too

On point number one, while this is certainly done for consumer protection and to prevent scam coins being sold, Higashi states that it will be at the cost of destroying legitimate businesses who wish to experiment with altcoins or blockchain technology in general.

This list of approved currencies will likely be very exclusive and only a few major virtual currencies such as Bitcoin and Ether will be approved.

As the authorities can’t tell good coins from bad, they are more likely to stay conservative about the coins they add to the approved list to avoid potential mistakes.

Additionally, selling and/or promoting new coins with ICOs in Japan will be difficult. As one of the most active ICO investors in the world, the new regulation will change that. This could potentially see the Japanese community missing out on taking part in innovative new services.

Many blockchain 2.0 projects are also likely to be affected who use native tokens or custom tokens on the blockchain.

This means that IndieSquare, Project ORB, and Spells of Genesis, which Higashi is involved with, which use the Counterparty protocol to issue custom tokens on the bitcoin blockchain for gaming and content creation, are likely to be affected.

Higashi said:

We can shift our focus on overseas, so it’s not the end of the world for us to change our business model or limit features for the Japanese market.

On the second point, the law doesn’t differentiate between whether trading entities are custodial or non-custodial.

Even though the BitLicense received criticism from the bitcoin community, it made sense because it was a regulation for custodial exchanges holding users’ money to protect consumers.

That, however, is not the case in Japan. Regardless of whether they are holding customer funds when facilitating or promoting the sales of trading of virtual currencies, they are required to comply with regulation and pay a significant price too.

Some of those affected include financial cryptocurrency platform OpenLedger, bitcoin exchange Bitsquare, and IndieSquare.

However, the whole point of a decentralized exchange is that users are protected by the security of the blockchain. So, how a security audit is going to impact money laundering is not known, when, as Higashi says, it’s possible to access unregulated ones outside of Japan.

Additionally, Higashi says that the same requirement will apply to payment hubs for the lightning network, TumbleBit and any other exciting trustless technology currently under development.

This, essentially, means that the development of new peer-to-peer payment technology could slowdown in Japan.

Outcomes

Just a few outcomes that Higashi thinks will happen are that foreign exchange services such as ShapeShift, Local Bitcoin, Bittrex, and Poloniex will have to stay out of the market unless they decide to become a registered business.

Smaller local businesses and projects will shut down their services, get acquired by larger companies or leave the market.

Bitcoin trading volume will accelerate further while other facets of the technology stagnate. CCN previously reported that several bitcoin startups have expressed relief and enthusiasm for governmental regulation.

What impact the law is likely to have on the Japanese community is yet to be seen, however, Higashi concludes by saying that to protect ill-informed users and bring more perceived legitimacy from the public, the law may end up sacrificing the long-term growth of the technology and unique businesses in Japan.

It’s kind of a trade-off and the industry will enjoy its benefits in the short-term, more exposure on the mass media, more new users, and increased trading volume. But at the same time, in the mid to long-term, it may hinder development of cutting edge technology and innovative businesses and get left behind.

Images from Shutterstock.

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