Visions of a worsening cryptocurrency crash and the ruin of global investors have recently been put aside at a luxury hotel in Okinawa, where one of the industry’s most important annual conferences took place. celebrated the opportunities of blockchain technology with influencers such as Mr Block and Miss Bitcoin.
At the invitation-only jamboree, more than 1,600 executives and industry gurus gathered to celebrate all things virtual. “The future has arrived,” declared the conference slogan. The mood of the three-day event in Naha, the manager of an online Japanese exchange said, was “alcoholic and optimistic”.
But back to Tokyo, where the drier, quietly pioneering work involved in the country’s daring digital currency experience takes place, the tone was very different.
In in-depth interviews with the Financial Times, current and former industry executives, lawyers and financial regulators have sounded the alarm over a spiraling regulatory crisis in the multi-billion dollar virtual asset industry in the world. Japan.
“When Japan decided to experiment with self-regulation of the cryptocurrency industry, many people around the world said it wouldn’t work. Unfortunately, for now, it seems they’re right” , said a person close to industry and government.
Over the past few months, major disagreements have opened up within the Japan Virtual Currency Exchange Association – the body created in 2018 to set a global precedent for crypto industry self-regulation.
The organization itself, said members drawn from the country’s 32 licensed crypto exchanges and including former government officials, is in the grip of a crisis that threatens its entire purpose.
Japan’s financial services agency has repeatedly criticized its poor governance, and in a stunning act of defiance to Japan, JVCEA secretariat staff even formed a union to try to protect themselves.
The origins of the crisis, which involves a standoff with regulators, corrosive infighting and a chronic lack of resources, lie in Japan’s approach to cryptocurrencies and the country’s status as a pioneering global hub for virtual asset trading.
A little while before dramatically imploded in 2014, Japan-based crypto exchange MTGox was the world’s most active in terms of traded volumes of bitcoin and other early cryptocurrencies.
As part of its sequel efforts to protect individual investors while securing the country’s status as a hub for a fast-growing business, the government became the first in the world to recognize cryptocurrencies as financial assets in 2017.
Soon after, amid an explosion in trading and a boom in investment from young Japanese clients, the FSA established the first licensing system for crypto exchanges.
At the same time, he began his experiment in industry self-regulation, hoping that, given his own limited resources, he could rely on the JVCEA to police his own members and develop dynamic policies for the industry.
Four years later, the regulator does not seem satisfied with the results.
December board meeting minutes obtained by the FT describe JVCEA receiving an “extremely stern warning” from the FSA during two meetings late last year.
People familiar with the situation said the regulator was concerned about delays in crucial anti-money laundering regulations and, according to the minutes, was not “clear about the type of deliberations of the organization, on the decision-making process, why the situation was like that, and what was the responsibility of the members of the board of directors”.
The FSA also pointed to a lack of communication between JVCEA’s administrators, its secretariat and member operators, leading to poor management of the organisation.
The recent market turbulence has meant that new and well-established cryptocurrencies have had to go through a comprehensive review process before new operators can trade them. In some cases, it took six months to a year for a single currency to be reviewed by the JVCEA.
“Regulators have pushed for anti-money laundering regulations…but the industry has taken its time working on it. There is a very strong demand from the FSA to act on this,” said Masao Yanaga, professor at Meiji University and board member of JVCEA.
Yanaga said the JVCEA lacked the resources to act quickly. He also raised concerns that crypto exchanges were small operators “so if they were asked to implement high-level measures, it would be really difficult for them to respond.”
He added that anti-money laundering rules were difficult to implement in the absence of international agreements on sharing customer data between exchanges.
“Exchange operators are concerned that even if we create these rules, they won’t be able to implement them,” he said.
A person close to the JVCEA said staff at the office were mostly made up of retirees from banks, brokerages and government departments rather than secondments from member companies.
“That’s why no one there really understands blockchain and cryptocurrencies. This whole mess shows it’s not just a governance issue. The FSA is very angry with all management the person said.
In response to a request for comment, the JVCEA said it was making improvements in response to FSA concerns.
The JVCEA is chaired by Satoshi Hasuo, chairman of industry giant Coincheck, with appointed representatives from various operators and outside experts serving on its board.
Although he is working to speed up the approval process, those opposed to Hasuo within the JVCEA have said delays in approving digital coins create an unfair disadvantage for new entrants as they were looking to compete with more established players such as Hasuo’s Coincheck.
The JVCEA admitted that the process had taken a long time due to a lack of qualified staff and that this “caused inconvenience” for new members. But he added that he had no intention of favoring more established exchanges.
Those who knew the union said it was created by employees who were unhappy with the decisions taken by management. His demands, which he posted on social media, include the removal of high profile figures at the JVCEA.
Board member Yanaga admitted that it was “very unusual for a union to be formed in such a small organization”, adding that he “suspected that people in the understaffed management office suffered a lot of pressure to process many parts requests quickly.”
The FSA and Coincheck declined to comment.