The Mysterious East: Decrypting Japanese Crypto Traders

Japan is one of the key countries in the crypto financial world, where the headquarter of Bitcoin.com is situated, the crypto exchange Mt. Gox was established, the Bitcoin’s creator Satoshi Nakamoto name comes from, and cryptocurrencies in general are legalized.

But, what do we really know about the growing industry of cryptocurrencies in the Land of the Rising Sun? What and where can be bought in Japan with crypto? What is the attitude of the authorities towards digital assets after adoption of the regulatory legislation?

Recent changes in the structure of Japanese state apparatus, as an appointment of a prominent pro-blockchain politician Takuya Hirai as Minister of Science, Technology, and IT, could benefit the further development of the blockchain technology in the country.

Housewives behind Bitcoin surge

Before the advent of the Japanese currency, Japanese traders were considered extremely cautious and conservative. They rather preferred to invest in low-yield risk-free assets, such as national bonds.

However, a recent study by Deutsche Bank showed that a large number of Japanese crypto traders, despite all of the previous history, cease to be cautious, choosing risky, but highly profitable investments. According to Deutsche bank AG analysts, “retail investors are shifting from leveraged foreign-exchange trading to leveraged cryptocurrency trading.”

They also developed a profile of an investor who stands behind the surge in Bitcoin – so-called Mrs. Watanabe, a common term used to describe a housewife who runs her family’s finances.  Japan is unique in terms of women’s power called “okozukai” in finance system. And crypto industry is not an exception.

On April 10, 2018, the Financial Services Agency of Japan (FSA) published the first in the world statistical report on domestic cryptocurrency trading over the past financial year.

According to the data collected from seventeen crypto exchanges, the country has about 3.5 million individuals who conduct annual transactions in the amount of more than $97 billion. The bulk of these traders are Japanese businessmen around the age of 30. 143,000 of them prefer margin trading and cryptocurrency futures.

Market review

In mid-2018 Japan had a dominant share in the world trade volume of BTC. In July the pair BTC/JPY according to the CryptoCompare website accounted for almost 60% of all operations with Bitcoin, which indicated the unprecedented popularity of this currency in the country. Even as the stablecoin trend, which appeared on the market in the second half of summer, took USDT into the lead, the Japanese yen still remains in the top four currencies with the highest trading volume against Bitcoin. Although this figure has dropped to seven percent, which is eight times lower than the summer value.

Since 2014, the annual trading volume in pairs with Bitcoin has grown from $22 million to $97 billion in the country. At the same time, Bitcoin trading as the main asset, such as futures, has increased even more: from $2 million to $543 billion for the same period of time.

It seems that Bitcoin hasn’t lost its popularity even in view of recent events — the Japanese continue to believe in Satoshi Nakamoto’s brainchild. But diversification is also practiced — the portfolio of the average Japanese trader includes such altcoins as ETH, XRP, BCH and EOS.

Moreover, the "Trade to Mine" technology, recently announced by several cryptocurrency exchanges, is gaining popularity in Japan — local tokens are credited for trading on these exchanges. The company CoinJinja even introduced into its analytical application CoinView, a special trading bot, which can "mine" such coins. The function is called “Hummingbird” and at the moment is actively promoted both in Japan and abroad.

Besides, in Japan there is almost no peer-to-peer trading between individuals, and 99.9 percent of all transactions are carried out through exchanges.

Mt. Gox and Coincheck

The history of digital currencies in Japan is inseparably linked with the two largest cryptocurrency hacks.

The first was the hacking of the Mt. Gox exchange in 2014, where attackers managed to steal 850,000 BTC for a total of $473 million. When news of this broke, Bitcoin's price fell by 20 percent and only stopped around $483. It took the market a whole year to restore its previously held values.

This incident also had a "conditionally positive" effect. After the Mt. Gox collapse, regulators seriously took up the issue of regulating cryptocurrency transactions in the country, which led to the emergence of a number of bills.

Much later, in early 2018, the market experienced a second major shock — a hacker attack was directed toward the NEM hot wallet, in one of the largest crypto exchanges in Japan, Coincheck. On Jan. 28, criminals managed to withdraw the most significant amount in the history of crypto crimes — more than $500 million.

This hack sent a devastating blow to the entire Japanese crypto infrastructure, since the entire POS application of "Mobile Payment for Air Regi" belonging to the big Japanese company Recruit Lifestyle was connected to this exchange. On its own, the application was used by more than 260,000 Japanese shops for executing transactions.

The total damage caused to the global crypto economy amounted to more than $1 billion and significantly affected the dynamics of all cryptocurrencies. From that moment the state began to get involved and the direct regulation of cryptocurrency began to take more prominence.

State regulation

February 2014 — CEO of Mt. Gox Mark Karpeles held a press conference where he reported a theft of 850,000 BTC. Concerned, the Japanese government decided to look into the issue in detail.

March 7, 2014 —  the National Senate moved forward to legalize Bitcoin. The resolution didn’t consider Bitcoin as a currency or a security in accordance with the current banking law and recognized the absence of laws that would unconditionally prohibit individuals or legal entities from obtaining Bitcoin in exchange for goods or services. At the same time, authorities started discussing the possibility of applying taxation to Bitcoin.

May 4, 2016 — after lengthy disputes and discussions, Japan officially recognized Bitcoin and digital currency as "a means of payment that is not a legal currency" (Japan's Payment Services Act (PSA), art. 2-5). Also, amendments were made to the Law on the Establishment of Foundations. According to the new legislation, all Japanese cryptocurrency exchanges must be officially registered and listed in the Financial Services Agency of Japan (FSA), in order to offer the residents cryptocurrency transactions.

April 1, 2017 — after a year of preparation, a historic bill was adopted. The government of Japan was the first in the world to give the status of a legitimate means of payment to most cryptocurrencies, which since then were no longer considered to be commodity-material assets, and hence were no longer subject to value-added tax (VAT), which accounted previously for 8 percent.

At the same time, the law on cryptocurrency exchanges came into force, designed to protect consumers from fraudulent transactions and help them to distinguish between safe and untrustworthy exchanges. According to the law, all crypto exchanges had to pass the licensing procedure with the FSA by September 2017. It presupposed certain operational requirements for exchanges, including high standards for cybersecurity, segregation of customer accounts and the verification of their identity. In addition, to obtain a license for carrying out such activities, it was necessary to pay a one-time non-refundable contribution of $300,000. In fact, it was something close to the Japanese equivalent of BitLicense, introduced in 2015 by the state of New York.

To date, the FSA's license for financial transactions has been received by sixteen local exchanges, including Bitflyer, Bitbank, Bittrade, and Bitocean. While about sixteen exchanges received a temporary status of "quasi-operators" — a special category of exchanges that started their activities before the introduction of licensing.

Another important measure of the new requirements was the global counteraction to money laundering (AML). As part of the policy, the Agency imposed a ban on anonymous cryptocurrencies, such as Monero or Dash, because of the potential for their use for fraudulent purposes. The official law came into force on June 18.

How did this affect ordinary crypto traders?

On the one hand, after the legalization of BTC and altcoins, 8 percent of VAT has been removed from the total amount of taxes. However, traders didn’t receive complete freedom from taxation-related obligations.

In February 2018, the Japanese National Tax Agency revised the issue. Now, traders must pay the government from 15 to 55 percent, while the profits from forex exchanges and trade promotions were taxed with a fee of up to 20 percent.

The amendment triggered a dual reaction among market participants, some of which started considering transferring their activities to other states. During one of the interviews to Finance Magnates a Japanese crypto influencer Koji Higashi shared his outrage at the taxation in his country, which he considered to be “hurting the industry quite a lot”:

“It doesn’t make sense to use Bitcoin as a payment in Japan. Technically, you can buy a car now using Bitcoin, but it doesn’t make sense because of the tax.”

On the other hand, cryptotraders in Japan now receives full legal state protection of their activities and assets. For this purpose, Japanese regulators have already sent business improvement orders, related to anti-money laundering (AML) and know-your-customer (KYC) requirements, to six major cryptocurrency exchanges, Cointelegraph reported on June 22.  

Due to the high popularity of cryptocurrency in the country and its legal status, the topic of blockchain and digital money is widely covered in media outlets. Moreover, there exists among the traders a lot of so-called "message boards" which are widely used for facilitating the search of information –– aggregators of news from various sources, both Japanese and foreign. This practice allows readers navigating successfully in the news background and make correct predictions.

Bitcoin accepted

Bitcoin in Japan is accepted for payment by large companies, including air carriers, hotels and retail chains, as well as by thousands of small sellers.

To conduct payment, POS-terminals integrated with cryptocurrency exchanges are used. In Tokyo, these places are mostly situated in the Roppongi area, particularly in restaurants and bars. For example, in the Hackers Bar you can drink coffee for BTC and discuss the basics of cryptography with the barista.

Living 100% without fiat money in Japan will not be possible at the moment. Payment for metro tickets, renting a house, buying most goods, especially European or American, are still made only for purchase with yen. But, one can always use an extensive network of crypto ATMs.

Local cryptocurrencies

In addition to Bitcoin, Japan has its universally recognized, "local" cryptocurrencies.

MonaCoin (MONA) is the first Japanese cryptocurrency to have one of the most active communities on the Internet. This is one of the few currencies in the world that is currently used to purchase online / offline products. MonaCoin is accepted by large restaurants and shops.

Cardano (ADA) is another very popular cryptocurrency in Japan, sometimes called the "Ethereum killer" or "third generation blockchain". Cardano plans to issue debit cards, which can be transferred to ADA from the Daedalus wallet. In this case, the tokens will be automatically converted into Japanese yens or other local currency, and these ADA cards can be used to withdraw cash from ATMs or to pay for goods in stores.

Nakamoto’s successors

Japanese opinion leaders include bloggers, businessmen, and politicians.

Koji Higashi has been working in the Japanese crypto business since 2014. He conducts various educational blockchain projects and owns the popular Japanese YouTube channel about cryptocurrencies called "Bitcoin Hanseikai". He is well-known for his criticism of Japan's legislative system in the field of cryptocurrencies and skeptical comments on many altcoins.

Miko Matsumura is the founder of Evercoin crypto exchange and BitBull Capital venture partner. As a key evangelist for the Java language and platform he participated in the first wave of the Internet, and devoted himself to the Internet of Value (IoV). During his 25 years career as an executive director in Silicon Valley, he raised more than $50 million in venture capital for start-ups with open source and more than $200 million for ICO projects.

Takuya Hirai is a member of the ruling Liberal Democratic Party and the author of 2017 law on the legalization of crypto exchanges. Together with representatives of the financial groups Mitsubishi UFJ, Mitsui, and Mizuho; Yuzo Kano, head of the country's largest exchange bitFlyer, and Toshifumi Kokubun, professor at the University of Tama in Tokyo, he is currently contributing to the development of the ICO regulation.

New type of Japanese businessmen

Japan is a state with a unique spirit, culture, and market, whose government was first ready to innovate during the cryptocurrency boom. The introduction of legislative amendments allowed the emergence of a new type of Japanese businessmen – cryptocurrency traders, who annually pay substantial dividends to the treasury.

Legalization has led to a noticeable increase of the popularity of blockchain technology in the country. Bitcoin and altcoins are discussed on central TV channels, and in major news outlets. Promising blockchain start-ups are appearing everywhere, state institutions conduct technological research, and ordinary people can send and accept cross-border transfers without fear of being fined by the government or hacked by fraudsters.

Moreover, large players from other Asian countries, such as South Korea and China, have begun to move to the Japanese market, bringing an even larger influx of budget money. While the analysts expect that cryptocurrency may contribute 0.3 percent to Japan’s gross domestic product in 2018, the final result that the digital money has brought to the Land of the Rising Sun will be revealed by the annual financial report.