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Cryptocurrency

Coinbase calls Japan's cryptocurrency crackdown 'good for us'

US-based exchange confident its focus on security will win regulatory approval next year

Bitcoin and other cryptocurrencies have fallen sharply in recent months, but Coinbase remains eager to enter the Japanese market.   © Getty Images

TOKYO -- Major U.S. cryptocurrency exchange Coinbase said Japan's tighter scrutiny of the industry will give it an advantage, signaling the company's confidence in securing regulatory approval to enter a market rocked by hacking scandals.

Japan has been considered a cryptocurrency haven for its large pool of retail investors and light-touch government policies, but regulatory oversight has increased in recent months amid a series of high-profile thefts. Coinbase's bid for approval to operate as cryptocurrency exchange here is being closely watched as a gauge of the country's openness to new players.

Talks on obtaining a license are "going well" with the Japan's Financial Services Authority, Mike Lempres, chief policy officer at Coinbase, told the Nikkei Asian Review in a recent interview in Tokyo. "We are ... committed to getting it done. It will certainly be in 2019."

Founded in 2012, Coinbase is one of the largest cryptocurrency exchanges in the U.S., with 20 million accounts and reportedly $1 billion in revenue last year. In June, the company announced it would enter Japan and appointed a managing director.

Coinbase is touting its investor safeguards. Lempres said that out of its 550 employees, "dozens" are dedicated to security. He said 99% of funds are stored offline, with only 1% held in "hot wallets" -- accounts that are connected to the internet for convenience but can be vulnerable to hacking. That 1% is fully insured, he said.

Coinbase Chief Policy Officer Mike Lempres speaks to the Nikkei Asian Review in Tokyo. (Photo by Takuya Fujisawa)

"The Japanese government is more focused on security," he said. "That is good for us."

Lempres said there are still issues that are under discussion for regulatory approval. One key question is whether the FSA will require the exchange's system to be managed in Japan. While such a move would improve the FSA's ability to monitor transactions, it could create additional security risks for Coinbase.

"We have everything built to protect our storage ... in the U.S.," said Lempres. "We won't do anything to even raise possibility of a hack. It would be hard for us to duplicate what we do in the U.S. today in Japan and other countries."

The FSA declined to comment on individual cases. It has not approved registration of new cryptocurrency exchange since December 2017, and about 160 companies are seeking approval. Administrative guidelines published last year stress the importance of strengthening the system risk management at exchanges.

Japan's financial regulator previously allowed unregistered crypto exchanges to operate while they await approval. That created a fast-growing industry with dozens of platforms, and Japanese retail investors were said to have a large influence on the price of bitcoin, among other digital currencies.

That changed when $530 million in cryptocurrency was stolen from Tokyo-based exchange Coincheck in January. Many exchanges unable to comply with the FSA's tighter restrictions have left the business or, like Coincheck, have been sold to a larger company. Fears of even greater scrutiny are growing after some $60 million in digital coins was stolen in September from Zaif, a virtual-currency exchange service operated by Osaka-based Tech Bureau.

Some analysts say increased regulatory scrutiny in Japan and other countries have dented investor appetite for both major coins like Bitcoin and new digital tokens issued through initial coin offerings, or ICOs. The price of Bitcoin was hovering at around $6,606 on Wednesday, almost a third of its December 2017 high, according to Coindesk. These ripple effects pose further challenges for cryptocurrency exchanges that generate most of their revenue from trading fees.

But Coinbase is optimistic. "Japan has been an active large market from the very beginning, and has proved resilient as it bounces back from several bad experiences," Lempres said. "We think there is great demand for a trusted provider of services here."

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