Crypto regulation in Japan could influence the rest of the world

14 April, 2019

Japanese regulators have had their eye on cryptocurrency for the better part of the last 18 months. It is no secret that Prime Minister Shinzo Abe and Finance Minister Taro Aso are both keen on the prospect of the Japanese government exerting more control over cryptocurrency assets and transactions. It could be that any regulations they eventually pass will also affect the rest of the world.

According to Crypto News contributor Tim Alper, Japan holds considerable sway among G20 countries who are set to meet again later in 2019. Those countries have thus far been reluctant to work on any sort of unifying framework for fear that government interference could hamper the fledgling crypto investment industry. But Alper also says that the time is right for change.

Prime Minister Abe is said to be preparing for the June 2019 summit with an eye on pushing a standard set of regulations all G20 countries could adopt without impeding cryptocurrency's progress. The fact that this next summit will be held in Osaka certainly gives Abe the upper hand.

5 key regulations in Japan

Before we worry about any sort of international regulatory standard, it's more important to see what happens in Japan. Any regulations pushed by Abe will likely have to be in place in his own country before the rest of the world will even consider them. G20 leaders will want to see the regulations in action before committing to working on any kind of international standard.

That being the case, there are five key regulations that Abe and his finance minister are currently pursuing:

1. Regulation of ICOs

Japan's Financial Services Agency (FSA) released a set of recommendations in 2018 as the result of a study group that focused on cryptocurrency regulation. At the top of the list was a proposal to regulate ICOs under the Financial Instruments and Exchange Act of 2006. Such oversight would put ICOs in the same league as traditional securities.

The impetus behind this regulation is the need to protect investors from falling victim to fraudsters. According to the FSA, as many as 80% of the ICOs offered in Japan are fraudulent. ICOs are so problematic in Asia that they are completely banned in both China and South Korea.

2. Taxes on crypto income

Next, Japanese regulators want to change the way taxpayers report their earnings on crypto assets. The goal is to be more consistent about taxation so that crypto assets are brought more in line with other assets. Details are sketchy at this point, but profits from crypto investments would have to be considered capital gains at the very least in order to accomplish the government's goal.

3. Regulated margin trading

Japanese regulators are also taking a look at margin trading on crypto exchanges. Just as with stocks, margin trading involves borrowing in order to purchase assets. The hope is that profits from those assets will eventually be enough to cover what was borrowed, and then some. Japanese regulators want to cap margin trading at 4 to 1.

4. Reclassifying cryptocurrency

Next up is a reclassification of cryptocurrency as a crypto asset. This is more semantic than anything else, but regulators believe the term 'cryptocurrency' is too confusing in Japan's financial sector. They believe that officially renaming cryptocurrencies as 'crypto assets' will clear up the confusion. Regulators also say that changing the terms would bring Japan's industry in line with international standards.

5. Mandatory cold storage

Perhaps the most important regulation Japanese leaders are entertaining is a mandate to force exchanges and other cryptocurrency businesses to keep the majority of their assets offline, in cold storage. Regulators want to do away with hot storage due to its high-risk nature.

This particular regulation is in direct response to a hacking incident in which an 18-year-old breached a popular Japanese exchange and stole the equivalent of USD $134,640 from thousands of users. Regulators say, and rightly so, that the magnitude of the theft could have been avoided had the exchange kept most of its assets in cold storage.

It is clear from the actions of Japanese regulators that Tokyo intends to take action one way or another. Regulators in that country do not want to stifle the growth of the cryptocurrency industry there for fear that they would fall behind China and South Korea economically. Yet at the same time, they are convinced that cryptocurrency is nothing short of a wild frontier as it currently exists.

Regulators believe the only way to protect consumers and reduce fraud is to start cracking down. You may or may not agree based on your opinion of government regulation. Regardless, it appears as though Japan's FSA is going to get what it wants eventually. Abe and Aso are both on board. That pretty much makes it a done deal.

Influencing the rest of the world

Let us just assume that the FSA does implement all of the regulations proposed by 2018's study group. What then? Would the rest the world follow and, if so, how long would it take for them to get in line? The answers to these questions are all hypothetical in that proposed regulations are not even close to being finalized yet. But let us assume they are finalized before the start of the G20 summit in June.

Some of the big G20 powerhouses are already talking cryptocurrency regulations of their own. A small number of those countries has already begun implementing new regulations. The point here is that the regulatory wheel is already rolling to some degree. Japan could put a lot more momentum behind things by coming to the June summit with its own regulatory framework already installed.

Imagine Prime Minister Abe presenting summit partners with an outline of Japan's regulations and how he expects them to benefit the cryptocurrency industry while simultaneously protecting consumers. If he were to make a compelling case, it is quite likely the summit could produce a framework on which the nations could eventually build an international standard.

That framework could be taken back to individual national governments for their own regulators to work on. Each country could draft regulatory proposals with the intent to bring them back to the next summit. Leaders could then discuss the new regulations, work out some sort of compromise, and institute an international standard.

Regulating investments first

It would appear as though Japan's regulations are aimed mainly at the investment class first. With the exception of taxation - which would cover every crypto owner regardless of asset value - the rest of the regulations would have little to no impact on the everyday consumer who uses bitcoins to play slots online.

In that sense, it is likely the average consumer wouldn't have a problem with an international regulatory standard. After all, international standards already heavily influence how fiat transactions take place the world over. They influence international investments as well. And yet there is something intrinsically different about cryptocurrency.

Is it possible that regulations intended to control the investment class will eventually make their way to consumers as well? Absolutely. Is it probable? Yes. Rare are the examples of government regulators beginning the process of regulating something only to stop before they reach the consumer level. They almost always continue expanding regulatory authority until it reaches consumers for the simple fact that nothing is ever truly controlled until consumer regulations are in place.

How we got here

In closing this post, it is important to note how we got here. Bitcoin was originally conceived as a decentralized monetary system that would never fall under the purview of government control. And yet, here we are. We got to this point through the development of centralized exchanges and the idea of purchasing cryptocurrency as an investment rather than a monetary system.

Once investors got involved in Bitcoin, prices started to climb. That encouraged more people to get on board. In order to facilitate trading Bitcoin in large volumes, centralized exchanges were established. And because exchanges are businesses, governments instantly felt the need to get involved.

Centralized exchanges are regulated by government for the protection of investors. And while this is good for investors, it does open the door for further regulation. If Bitcoin had never become an investment or a store of value, we might not be looking at international standards for regulation today. If Bitcoin had always remained a monetary system for buying and selling things, world leaders would probably not be looking at how to control it.

In the end, the popularity of cryptocurrency as an investment has brought us to the threshold of regulation. That is the way it works. The only way we can reasonably avoid regulations at this point would be to take the investment incentive out of cryptocurrency. And because that's not going to happen, it would appear as though regulation is here to stay.

The good news is that you and I can still buy bitcoins and litecoins in order to gamble online. We can still visit a Bitcoin casino to spin the reels on We should continue having the freedom to do so separate of any regulations Japan and the G20 might come up with.