TOKYO -- Japan's big, established brokerage houses are opening up to blockchain -- the technology behind bitcoin -- in a growing recognition of its game-changing potential despite a year and a half of setbacks for cryptocurrencies.
On Tuesday, Nomura and Daiwa, two of Japan's leading traditional brokerages, joined online players including Rakuten and Monex in a new association which will set rules for issuing blockchain-based digital securities. Known as security tokens, proponents claim this digital system can make the existing method of transferring securities obsolete. The association is headed by Nomura's arch rival, online broker SBI Securities.
Japanese promoters of blockchain hope the growing list of large companies backing its use in finance results in a boost of public confidence in the distributed ledger technology, whose applications range from currency to insurance, stock trading and supply chain management.
In the biggest crypto news in recent months, Facebook in June announced plans to debut its Libra digital currency for international transactions in 2020, putting blockchain back onto the agenda for bankers -- and regulators.
The idea of creating a digital competitor to the U.S. dollar has provoked a strong backlash from central banks around the world. A decentralized monetary unit raises the question of who would be responsible for regulating it. But analysts say that the technology is already there and cannot be uninvented, adding that if Facebook doesn't do it, that somebody else will.
Blockchain-based money has suffered a series of setbacks including initial coin offering scams, a plunge in the value of bitcoin and hacks last year at cryptocurrency exchanges including Japan's Coincheck and Zaif.
The technology is still immature, but Japanese companies are positioning themselves for a potential shift, as the new association for security token offerings shows. Market research company Gartner predicts that business value added by blockchain will grow to $3.1 trillion by 2030 from $176 billion in 2025.
E-commerce group Rakuten also started a cryptocurrency exchange service in August after taking over platform operator Everybody's Bitcoin in 2018. That move followed a takeover of embattled bitcoin wallet and exchange service Coincheck by major Japanese online broker Monex Group last year.
Monex is applying to join Facebook's Libra project as a member of the consortium governing the cryptocurrency. The company says it has not yet been notified about the status of its application.
On the device front, South Korea's Samsung Electronics this year released a smartphone that can keep cryptocurrencies in a cold storage wallet, which is seen as a safer place to hold blockchains because it is not connected to the internet.
"I hope 2019 marks the year when blockchain was finally recognized as a viable technology," Yuzo Kano, CEO of cryptocurrency exchange bitFlyer and chairman of the Japan Blockchain Association, said at an industry event in September.
His sentiment is widely echoed in the crypto community.
"The industry lacked a good use case of blockchain technology. There have been no killer apps since bitcoin [emerged]," said Go Masuda, chairman of the Japan Security Token Association. Facebook's foray into cryptocurrency means "the industry is now entering a new phase of commercial adoption."
Japan serves as an international hub for the cryptocurrency business, having introduced the world's first legislation covering such exchanges in 2017. The number of cryptocurrency accounts in Japan rose to over 3 million in July from 2.8 million in January, as the market shows signs of stabilizing.
"We have about 15 million holders of bitcoin today. Facebook has 2 billion users ... It's a huge step toward mass adoption," said Norbert Gehrke, a general partner at venture facilitator FinMirai and former managing director of technology at Barclays and Goldman Sachs. "The next phase of the industry will be big blue-chip players becoming more dominant."
Yet public confidence in cryptocurrency remains shaky. The price of bitcoin plunged from a record high near $20,000 in December 2017 to around $3,000 a year later. The news about the introduction of Libra lifted the price to nearly $14,000, but it sank below $8,000 again last week.
Security continues to be the biggest concern.
Cryptocurrencies are prime targets of cybertheft, so investors need to protect their security key from hackers by storing it offline in a dedicated chip.
But most investors fail to follow such a security protocol and ask the exchanges to take care of their assets. With only an ID and a password protecting the cryptocurrency accounts of these customers, hackers use these accounts to penetrate the exchange, said Naoyuki Iwashita, a professor at Kyoto University and a former Bank of Japan official.
The fact that cryptocurrency exchanges and custodians are often small startups with little credibility has not bolstered public confidence in investment, either.
Though blockchains themselves are seen as secure, the risk of there being gaps in security remains.
"It's a software," Gehrke said. "Humans are developing it. You can't be 100% certain."
Security would be easier if blockchain members were limited to businesses or professionals who understand the technology and can follow the required protocols. Blockchain platforms are increasingly created to address various business needs, such as automatically executing over-the-counter derivatives trades using a computer program and without involving a stock exchange.
Market research company Gartner identifies more than 100 platform vendors including NEM Foundation, a group behind the NEM cryptocurrency.
But few alternatives to blockchain have managed to replace the service that already exists.
"There is a good reason why a lot of commercial initiatives never take off from the pilot stage," said Jeff McDonald, NEM Foundation's interim chief technology officer. "A lot of initial experiments are around money. People are very cautious when it comes to a billion dollars. Most banks have done a test of blockchain, but they are really hesitant to dip their foot in the water and go live with a real billion dollars."
Gartner suggested that many businesses even question the need to adopt blockchain.
"Enterprises are in various stages of blockchain use and finding it hard to justify when many existing alternatives to blockchain platforms require less computing, development and tech expertise to accomplish key use cases," the research group noted in a report.
Gartner also expects that 90% of current enterprise blockchain platform services will need to be replaced by 2021 to remain competitive, up-to-date and secure.
Once security issues are addressed, experts think blockchain will be used more widely among businesses as a common platform, letting them connect more easily with each other, achieve greater scale and reduce costs along the way.
"Enterprises are not going to adopt a technology that is not going to ultimately help them with the cost-savings issue," said Alexandra Tinsman, NEM's president. "Enterprises are going to be using it for cost-savings and efficiency -- bottom line. If they can save money somewhere, they are going to do it."