Cryptocurrency in Japan: a regulatory overview

Legislative attitudes towards virtual currency vary widely around the world, spanning the gap from implicit bans in China, Bangladesh and Saudi Arabia to more accommodating environments like those found in Malta, Estonia and Uzbekistan. More common is the diffuse regulatory indifference seen in the USA, Australia and the UK, with central banks and governments attempting to shoehorn cryptocurrency into existing financial regulation, delaying regulation in the interest of ‘evaluating the applications of distributed ledger technology’ or often simply ignoring it.

The disparity in attitudes is disappointing given the ubiquity and popularity of cryptocurrencies around the world. A lack of regulatory oversight means that consumers and their funds are at greater risk of exploitation by criminals and insalubrious organisations; ironic given how perceived lawlessness is frequently used as an argument against the use of digital currency in the first place.

Against the grain

The major exception to the legislative ambivalence described above is Japan. The world’s third largest economy also boasts some of its most progressive and stringent cryptocurrency regulation. Significantly, regulating the market was a direct response to several high-profile crimes involving crypto assets. Instead of reacting negatively to these events, Japanese regulators used them as an opportunity to develop a legal framework that can help reduce the risk from fraud and illicit activity when buying, exchanging or otherwise transacting cryptocurrency.

A regulatory timeline

• February, 2014 – Japanese company Mt. Gox, the world’s largest cryptocurrency exchange at the time, ceases trading and files for bankruptcy. The losses incurred by creditors spur the Japanese government to implement protective measures for consumers using digital currencies.
   
• June, 2015 – The G7’s Anti-Money Laundering (AML) initiative, the Financial Action Task Force (FATF), publishes ‘Guidance for a Risk-Based Approach to Virtual Currencies’. This requires all cryptocurrency exchanges to be licenced and compliant with AML and KYC (know-your-customer) laws.
   
• March, 2016 – As a result of the report, a bill to amend the Payment Services Act to align more closely with the FATF’s recommendations is submitted to the Japanese Diet. The amendments are passed in May.
   
• April, 2017 – The new, updated Payment Services Act comes into effect. Cryptocurrency is now legal in Japan. 16 exchanges register with Japan’s Financial Services Agency (FSA) by the end of the year.
   
• January 2018 – Crypto exchange Coincheck reveals that more than $500 million worth of digital currencies held in their systems have been stolen by hackers.
   
• March 2018 – The FSA takes a pragmatic, measured response to the Coincheck hack, forming a Virtual Exchange Services study group to refine crypto regulation. This results in the formation of the Japan Virtual Currency Exchange Association (JVCEA), a self-regulating body operating in collaboration with the 16 registered Virtual Currency Exchange Service Providers. The JVCEA provides advice for unregistered exchanges and monitors AML and regulatory compliance.
   
• August 2019 – Wirex is officially registered as a Type II member of the JVCEA after a comprehensive two-year evaluation process.

The implications

The laudable efforts of Japan’s financial authorities to impose a working regulatory framework for cryptocurrencies should set an example for regulators around the world. By refusing to overreact to high-profile security breaches and allowing space to learn from mistakes, bodies such as the FSA and JVCEA have given cryptocurrencies a similar level of oversight to traditional financial assets. Importantly, regulators have shown willingness to adapt legislation when it becomes clear it is not sufficient.

By acquiring Type II membership, Wirex underlines its commitment to regulatory compliance and best practice in everywhere we operate. In the words of Wirex cofounder Pavel Matveev:

“We welcome the level of due diligence shown by the JVCEA - by adhering to their rules, we ensure that Wirex remains at the forefront of compliance, security and regulatory best practice. The acquisition of type II membership is a proud milestone for Wirex and brings us closer to being fully operational in Japan.”

The next target for Wirex is Type 1 membership, which will establish the platform as a legal Crypto Asset Exchange Service Provider and allow us to offer our full range of services to Japanese customers. If successful, Wirex will become only the 19th company to reach this milestone – so watch this space!