The financial industry is usually no cheerleader of new regulations imposed on it by government authorities. But when the Japanese government amended its Payment Service Act by promulgating the Virtual Currency Act this April, fintech (financial technology) service companies and institutional investors generally welcomed the move.
“Normally, regulation is not a good thing,” says Mike Kayamori, CEO and co-founder of Quoine (pronounced “coin”), a Singapore-based B2B fintech startup that also has operations in Japan and Vietnam. “But for cryptocurrencies regulation is a blessing.”
Until now, these virtual currencies have been operating in a gray market, a situation that has made long established companies in the financial industry hesitant to take them up.
“We need to work within [financial] regulations,” says Kayamori. Quoine, which is funded with $20-million, provides a cryptocurrency exchange platform for other companies to trade off of or to use as a white label technology for their own customers. “We need to work in the financial eco-system. No financial services or institutions will work or partner with a company that’s in a gray zone.”
The Japanese bill currently recognizes only certain well-established cryptocurrencies, namely Bitcoin and Ethereum, as legal means of payment, and as products that can be bought and sold without Japan’s 8 percent consumption tax coming into play.
Nevertheless, the new law falls short of declaring these volatile currencies to be legal tender. And though the amendment now sanctions the use of cryptocurrency exchanges, it also imposes regulations on the operators. These injunctions include mandatory registration with the government, minimum capital of 10 million yen ($90,000), a secure IT system to prevent theft, and mandatory annual auditing by a certified accountant.
Despite the ultra-cautious reputation Japan’s conservative financial authorities and institutions have earned over the years, this move to legitimize cryptocurrencies through government registration and regulation makes Japan the first nation to take such bold steps, notes Kayamori. While registration is also being introduced in the United States, it is being conducted on a state-by-state basis, which makes obtaining all the proper paperwork a byzantine process.
“It’s very difficult in the U.S., where there are a lot of government bodies you need to get approval from,” he adds. “Whereas in Japan, you just need the FSA (Financial Services Agency) approval. And that’s it.”
What changed the Japanese governent’s attitude toward virtual currency? The Mt. Gox calamity in 2014. The Bitcoin exchange company based in Japan folded after more than 800,000 Bitcoins went missing. The financial disaster led to the arrest of the company’s CEO Mark Karples on charges of embezzlement, and the news damaged the reputation of cryptocurrencies for a time. Notably, this occurred at a time when regulations were nonexistent in Japan. “So Japan, almost out of necessity, had to regulate the cryptocurrency market,” says Kayamori.
To date, at least 16 companies including Quoine have registered with the FSA to set up cryptocurrency exchanges. They have a six-month grace period for their registrations to be accepted, or be forced to withdraw their services should registration be denied, Kayamori explained.
Quoine’s current and only product is a B2B trading platform for the exchange of fiat and crypto currencies. According to Kayamori, it is the most advanced platform in the industry, and can conduct one million transactions a second, and boasts a 99.96 percent uptime.
In June, the two-and-a-half-year-old start-up will launch Qryptos, an exchange for trading between ten cryptocurrencies minus fiat currency involvement. However, Qryptos will not be available in Japan, given that the government is presently recognizing only Bitcoin and Ethereum as sound products.
In the January to March quarter, Quoine conducted transactions swapping ten cryptocurrencies for mostly Japanese yen and U.S. dollar fiat currencies to the value of $5.6 billion. That’s a tiny amount when compared to the financial industry’s overall volume of transactions. “But from a startup perspective, we are already operationally profitable, and growth is enormous,” says Kayamori.
On 11 May, Coindesk, an online news site focusing on digital currencies, tracked the price of Bitcoin passing the $1,800 mark for the first time, and the price of other cryptocurrencies also rose sharply. In January, the value of Bitcoin was less than $1,000. Financial analyst Brian Kelly told CNBC in the US that he believed the rally was a result of Japan legalizing Bitcoin, which encouraged institutional investors to buy the virtual currency.
But Kayamori also injected a cautionary note when talking about such wild fluctuations. “People can say this an irrational market, but markets tend to be irrational. As I’ve said, it is difficult to know if this is a bubble or not.”