Japan 2019: Oversight and education to channel crypto’s evolution

The NEM Foundation (the non-profit arm of the New Economy Movement) has launched a Japanese branch to help popularise blockchain and cryptocurrency in the country.

Since completing corporate registration in Japan on the 28th of November, "NEM Japan" is providing support and technical information for companies that have already adopted NEM, and those that are considering blockchain initiatives. This includes holding study sessions and events related to NEM in various regions of Japan.

Based in Singapore, the NEM Foundation has offices in several countries — including Malaysia and the [UAE](https://medium.com/nem-sea/nem-foundation-to-provide-blockchain-consultancy-and-services-to-uaes-ministry-of-community-d2922bf70252 https://nem.io/enterprise/partner-companies/) — where the foundation is already providing blockchain consultancy services.

NEM, the altcoin released in 2015, rose to prominence as a community-oriented cryptocurrency, its main feature being a consensus algorithm called "proof of importance" in which users are evaluated on their amount of retained coins and frequency of trades: the higher a user’s "importance score" on the network, the easier it is for them to receive rewards.

By forging early partnerships with Japanese exchanges Zaif and Coincheck, NEM ensured that its cryptocurrency XEM was readily available to Japanese traders, with whom the coin proved very popular.

In January of this year, however, Coincheck was hacked, in what is thought to be the biggest ever heist of cryptocurrency — with 58 billion yen (~$500 million USD) of NEM stolen. In September, rival Japanese exchange Zaif was also hacked, and 7 billion yen (~$62 million USD) of cryptocurrency assets were lost, including BTC, BCH, and Monacoin. Victims of the hack were compensated through an agreement with parent company FISCO Ltd, and NEM continues to trade on both Zaif and Coincheck.

Money laundering reports on the rise

In other news from Japan, almost six thousand crypto transactions have been reported on suspicion of money laundering and illicit activities.

Since new regulations were introduced last year that made the reporting of suspicious transactions to The National Police Agency (NPA) in Japan mandatory for crypto exchanges, the number of reports has significantly increased, and a total of 5,944 were filed between January and October 2018. This represents a significant increase from the 669 suspicious transactions that were reported between April 2017, when the regulations were first introduced, and January 2018.

According to a report on money laundering and terrorist financing from Japan’s National Public Safety Commission, "the risk of misuse for money laundering is relatively higher (in cryptocurrency) than other lines of business". Reasons for reporting transactions as suspicious include "multiple applications for authorization with different names and birth dates while attaching a photo with the same person’s face, opening multiple bank accounts and user registrations with the same IP address, and users claiming residency in Japan but primarily logging into their accounts from outside Japan."

Other signs of money laundering activity include obtaining an account in someone else’s name without authorization, using credit card information to purchase cryptocurrency, and exchanging cryptocurrency into Japanese yen on an overseas exchange website before transferring it to another person’s account.

FSA likely to wade into crypto derivative trading

For crypto derivatives traders, a new report from Japan’s Financial Services Agency (FSA) signals that more regulation or enforcement of existing securities laws in likely in 2019.

According to the ‘Study Group on the Virtual Currency Exchange Services’ report, with derivative trading in cryptocurrencies accounting for approximately 80% of cryptocurrency trades in 2017, there have been many complaints from crypto exchange users to the FSA regarding the inadequacy of exchange operators’ systems and ambiguity of service content for derivative trading.

The report also indicated that cryptocurrency derivative trading is subject to financial regulation in many other countries, however, it is not yet subject to regulation in Japan. Furthermore, the agency wrote that "there is no precise evaluation regarding the usefulness of cryptocurrency as an underlying asset, and its usefulness is being exacerbated exclusively by speculation. Thus it is difficult to ascertain the positive social significance (of cryptocurrency derivative trading) at present."

The agency also stated, "At the very least, we believe it is fundamental that the same business regulations for other derivative trading should be applied (to cryptocurrency derivative trading) in Japan as well."

On margin rate magnification in margin trading, the agency said: "Under present conditions, there are (cryptocurrency exchange) operators that offer leverage of 25 times. However, considering cryptocurrency value fluctuations are much greater than legal tender, we believe it would be suitable to set an appropriate ceiling in accordance with the actual situation."

In other regulations, such as for ICOs, the agency pointed out that in many other countries, clarifications are made in terms of the possibility for items recognized as investable to be subject to existing securities regulations, and administrative measures are being implemented in line with these warnings and regulations.