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Burned by bitcoin -- Son's misadventure tells wider story

Japanese billionaire's loss shows urgent need for regulation in nascent market

| Japan

Masayoshi Son is often called Japan's Warren Buffett. It is a useful comparison as the SoftBank billionaire scours the globe for value investments, and, as with Buffett, some of his choices leave observers perplexed.

News that Son lost $130 million of personal money on bitcoin is now Exhibit A of this phenomenon. As The Wall Street Journal reported last week, the Sage of Tokyo bought the digital currency in late 2017 just as it was peaking near $20,000. He then reportedly dumped bitcoin in early 2018 as prices nose-dived (since then it has recovered to about $5,100).

The story raised a couple of intriguing questions. Who, for example, leaked this embarrassing loss and why? It comes, after all, as investors question the $100 billion SoftBank Vision Fund's bets on Uber, WeWork and other potentially overvalued Silicon Valley unicorns.

The bigger quandary is how a savvy investor who says "I think I'm better than others at sniffing out things that will bear fruit in 10 or 20 years, while they're still at the seed stage" got caught up in cryptocurrency mania?

The answer may have more to do with bitcoin than Son. It is an asset that can seem more pyramid scheme than store of value.

Son is in risk-on mode. The Buffett-like halo investors bestow on him stems from his $20 million bet on an obscure Chinese startup in 2000. The juggernaut that Son helped finance was Alibaba, and his investment was worth $50 billion when that company went public in 2014.

The SoftBank founder is trying to strike gold again. His giant wagers on ride-hailing startups like Southeast Asia's Grab and America's Uber seem part of a strategy of hope. Son needs another big win to keep the Saudi benefactors, who back his funds, happy and writing those multibillion-dollar checks.

Yet Son forgot his Buffett 101 lesson: never invest in something you do not understand. This Buffett-ism proved useful after Lehman Brothers crashed in 2008. One reason Berkshire Hathaway rode out that storm was it had little leverage. At the time, he called the derivatives that felled competitors a "fool's game."

Buffett has long said as much about bitcoin mania. As recently as Berkshire Hathaway's 2018 annual meeting, he warned that "cryptocurrencies will come to bad endings. There is nothing being produced in the way of value from the asset."

Son's own struggle with this dilemma is Japan's, too. A fascinating paradox surrounds Tokyo's effort to strike a balance on the unfolding blockchain revolution.

If an investing superstar like Masayoshi Son can lose money, anybody can. (Photo by Tomoki Mera)

Japan wants to be the vanguard of developed economies nurturing the likely future of money. The related startup boom could go some way to filling a void in Japan's otherwise aging and risk-averse economy. At the very least, it could restore a bit of glitz to a tired brand.

Yet, Tokyo also has been the site of the cryptoworld's two most audacious hacking scandals. On involved the Mt. Gox exchange in 2014, the other at Coincheck in early 2018.

For sure, these incidents demanded a stern reaction from the authorities. But Japan's penchant for bureaucracy and over-regulation can stifle financial innovation in the best of times, even without the added incentive of probing and punishing crime.

Tokyo is pushing ahead, though, with developing the market. If bitcoin is to survive, its advocates must accept greater regulation. That is crypto blasphemy, of course. But blockchain-based transactions are doomed without trust.

Punters have to know their money will not disappear in the night. They need assurances, too, that there are liquid ways to convert digital wealth into conventional money. That means agreed payment protocols, transparency between counter parties, defenses against hacking and money laundering, and legal recourse when things go awry.

Japan is rightly on the case. Since December, the Financial Services Agency has been working up revised regulations to ensure greater investor protection and force exchanges to be more transparent. More clarity is expected by late June when finance officials from Group of 20 nations visit Japan for a summit where Tokyo plans to put cryptocurrencies are on the agenda.

According to SankeiBiz, regulators are drawing up a handbook for the occasion so that each G-20 country "can use the regulations, such as measures to prevent the outflow of virtual currency."

The absence of international standards and crypto scandals from Japan to South Korea to Thailand have China going the other way. First, Beijing banned trading in 2017. Then initial coin offerings. The next step might be banning bitcoin mining as soon as May.

China's aversion matters because, at bitcoin's heyday, the mainland was home to nearly 90% of trades and roughly 70% of mining activity. For all its enthusiasm to become crypto-central, Japan lacks the scale to revive the market unilaterally. So, keeping China in the game is crucial.

Japanese regulators have something closer to an ally in South Korea. Seoul is now the third-biggest trading hub after the U.S. and Japan. While regulators limited trading and banned the use of anonymous bank accounts, they too are trying to pull off a difficult balancing act.

In late 2017, Korea's Ministry of Finance talked up the potential for "big revenue sources" that may be derived from crypto trading, ICO activity and related job creation.

North Asia has long been chronically short of the risk capital needed to catalyze a startup boom that creates jobs, wealth and corporate disruption from the ground up. Seoul is still trying to offer investor protection without killing the underlying asset.

India seems more in the Chinese camp. Last week, the Economic Times reported a likely move to ban cryptocurrencies. Thailand is veering more toward the positions held by Japan and Korea. It is still granting licenses to exchanges. The Bank of Thailand, meantime, is working to prototype its own digital currency.

The point, though, is that a nascent market needs guardrails to survive. When an investing superstar like Son, Japan's second-richest man, can stumble so spectacularly and quickly, bitcoin has a problem.

Even if Son's massive loss was with personal funds, not SoftBank's, the appearance of gullibility may be hard to shake.

Caveat emptor is the key to investment, as Buffett can attest. But the buyers need to know that markets have rules. Son's loss has as much to do with policymakers' failures as his own.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia for his Nikkei Asian Review work.

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