TOKYO -- Japan has officially registered its first 11 exchanges for such virtual currencies as bitcoin, financial authorities said Friday, but the effort to provide a basic set of rules for rapidly evolving financial technology is far from finished.
New payment legislation that took effect in April requires exchange operators to register with the Financial Services Agency and meet certain standards, such as holding a minimum of 10 million yen ($88,000) in capital and managing client funds separately from virtual currencies.
Tokyo has sought to create a safety net for users venturing into this emerging field of finance, hitherto free from the kind of industrywide rules binding other areas like banking and securities. The FSA has been inspecting companies since April.
This first wave of approvals included companies that had been operating exchanges since before the legislation came into force, like Tokyo-based bitFlyer and Bitbank, as well as such new entrants as SBI Virtual Currencies, an affiliate of financial services group SBI Holdings. Seventeen companies are still undergoing inspections, according to the FSA, which will continue registering approved companies in October and beyond.
Registered exchanges will undergo regular on-site inspections by the financial watchdog and be ordered to improve if operations are deemed inadequate. But officials sought to keep registration requirements to the bare minimum, worrying that too many strictures could stunt private-sector innovation and market growth potential. Even exchanges that did not make the first round of registrations will be able to continue operating from October onward, the FSA says.
Still, 12 exchanges have shut down since April, unable to meet the requirements. Users are increasingly likely to choose exchanges based on overall quality, eyeing such factors as fees, currencies handled and disclosure policies.
The scope of uses for blockchain -- the distributed-ledger technology underpinning cryptocurrencies -- is broadening. Japanese regulation also has some catching up to do with initial coin offerings and other offshoots of virtual currencies. "We're not opposed to changing the system if necessary," a senior FSA official said. For now, however, it will likely continue playing whack-a-mole against rapid technological change and the problems it creates.
Exchanges, police thyselves
A mix of legal frameworks and flexible self-regulation is critical for fostering a healthy market. But Japan's cryptocurrency industry is divided. It has two main groups: the Japan Blockchain Association, spearheaded by bitFlyer; and the Japan Cryptocurrency Business Association, which includes foreign exchange trading platform Money Partners of Money Partners Group. While April's new payment legislation allows for officially recognizing self-regulating industry groups, none has been approved so far.
The JCBA has a deeper bench of exchanges but does not count top-ranked bitFlyer, which holds more than a 70% share of trading, among them. The JBA includes a range of nonexchange businesses dealing with blockchain, and opinion is divided on whether it is suited to being a self-regulation body.
BitFlyer CEO Yuzo Kano, a JBA official, said the association would consider taking on such a role if it were necessary for the "healthy development" of blockchain.
Money Partners President Taizen Okuyama, who chairs the JCBA, said that "the authorities also feel the need for an approved self-regulation body."
With cryptocurrency technology marching forward, and a lack of regulations on leverage like those in forex trading, there is a growing need for exchange operators to self-police to protect investors from taking on too much risk and other dangers.
"Creating voluntary rules is critical from a user protection perspective," an FSA official told reporters Friday.