TOKYO -- Even as virtual currencies such as bitcoin have exploded in popularity worldwide, Japan's regulatory environment has failed to keep up -- something that must change in order to foster a thriving yet safe market in a promising area of financial technology.
Cryptocurrencies have rapidly gained ground as both a payment method and a vehicle for speculation. They enable users to send money via computer or smartphone quickly and cheaply.
As this fast-developing technology makes its way into everyday life, businesses are looking for ways to capitalize on it. Electronics retailer Bic Camera has begun accepting payment in bitcoin at stores, while MS&AD Insurance Group Holdings unit Mitsui Sumitomo Insurance offers insurance covering problems with cryptocurrency transactions.
The government and the Bank of Japan are taking steps to promote the market's healthy growth by protecting consumers. The Financial Services Agency has implemented a registration system for cryptocurrency exchanges in accordance with new legislation that took effect in April. The central bank is conducting research on virtual-currency systems to better understand how they are being used.
It's a new field, so it's impossible to predict what will happen going forward.A senior FSA official
But the lack of a body to oversee cryptocurrencies from creation to circulation means there is nothing underpinning trust in them. Authorities have not yet fully figured out how to handle this new form of value.
"It's a new field where the technology is still being developed, so it's impossible to predict what will happen going forward," a senior FSA official said.
Memories of hundreds of millions of dollars in bitcoin going missing from the Tokyo-based Mt. Gox exchange in 2014 are still fresh. If people look at the current situation and decide that cryptocurrencies are too risky to use after all, the budding market that has taken so much effort to cultivate could wither away. To avoid this, and to encourage growth in the financial industry, the government and the private sector must put measures in place to help virtual-currency markets work smoothly, including clear trading rules and thorough information disclosure.
Next month could see a bitcoin fork -- a split into two incompatible versions of the underlying system -- amid a debate over how to handle a lack of capacity. That would be one of the biggest turning points for bitcoin since its creation, said virtual-currency expert Yukio Noguchi, an adviser at Waseda University's Institute of Financial Studies.
"Trading could be disrupted if there's a fork," Noguchi warned.
The FSA says it will respond promptly to problems after they occur, but too heavy-handed an approach by the government could sap the vitality of industry. Striking the right balance between regulation and permissiveness is no easy task. The rules surrounding virtual currencies must be reworked flexibly to ensure both convenience and safety. Hopefully the public and private sectors, working toward the same goal of developing the cryptocurrency market, will create a virtuous cycle that can give rise to new innovations.