TOKYO -- Mitsubishi UFJ Trust and Banking is preparing a scheme for protecting holders of cryptocurrencies if the exchanges they use fail -- a risk that veteran fans here know all too well.
This highlights how Japan's finance industry seeks to make the most of the opportunities associated with virtual currencies, which the country has taken to in a big way, accounting for around 40% of global bitcoin trading. Japan was also the epicenter of one of the digital currency's biggest shocks -- the 2014 collapse of Mt. Gox, the largest bitcoin exchange at the time.
Mitsubishi UFJ Trust will offer a way to keep exchange customers' cryptocurrency holdings separate from the entrusting exchange's assets. This will make it the first trust arrangement of its kind in the world, according to the Mitsubishi UFJ Financial Group member, which recently applied for patent protection.
The service, available only for bitcoin at first, could launch as early as April once Japan's Financial Services Agency recognizes cryptocurrencies as an asset that can be placed in trust, like real estate or securities.
While the market value of major cryptocurrencies has reached $300 billion, bitcoin and its kin remain decentralized creations without an oversight body like a central bank. This freedom forms part of their appeal. But as use of virtual currencies grows, so has the need for rules and safety nets to protect holders.
Cryptocurrency exchanges log users' reported transactions, which add to or reduce holdings. Mitsubishi UFJ Trust will maintain the same records as its exchange clients. Should the exchange operator fail or be involved in wrongdoing that subjects customers to losses, the records will be used to guarantee the safety of holders' bitcoins.
Holders will not be shielded from losses associated with volatility in the currency itself. The issue of whether cryptocurrency exchanges should adopt circuit breaker mechanisms that halt trading in the event of violent market swings, as in stock or foreign exchange trading, remains one for debate.
Many cryptocurrency exchanges are run by startups of little repute and unknown trustworthiness. Using an arrangement like Mitsubishi UFJ Trust's would entail a fee. But "customers will feel peace of mind knowing that a trust bank is managing their assets," said CEO Noriyuki Hirosue of Tokyo-based exchange Bitbank.
To use the service, exchange customers will opt in when they start trading. Mitsubishi UFJ Trust will monitor the accounts of those who do for suspicious activity and examine pending transactions in detail as needed. A late-night sale of a huge amount of bitcoins, for instance, would get flagged for inspection instead of being processed immediately.
The FSA began registering cryptocurrency exchanges in earnest this past autumn. But both regulators and the Ministry of Finance are still playing catch-up with the fast-growing cryptocurrency sector, which poses new challenges as well as modern takes on such familiar ones as fighting money laundering.