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Biz / TechMonday, October 2

Asia Cracks Down on Cryptocurrency

Virtual currencies are gaining popularity worldwide. The price of Bitcoin has tripled since the beginning of this year. Amid the ongoing boom, some Asian countries are starting to tighten regulations.

Chinese authorities have begun imposing tougher restrictions on virtual currency trading. Some major Bitcoin exchanges announced they would suspend trading or halt conversions with the yuan. In Japan, virtual currency exchanges will be required to register with the Financial Services Agency starting in October. The move comes after the failure of major Bitcoin exchange Mt. Gox in 2014.

NHK World’s Masashi Kato talked with Kariya Kayamori, CEO of QUOINE, one of Asia’s major cryptocurrency exchanges, on the latest moves.

Kato: First, let me ask you about China’s recent move to tighten regulations on cryptocurrencies. What’s behind it?

Kayamori: I think it's very simple. The Chinese communist party wants control and anything that is out of control is dangerous to their society. And as the nature of cryptocurrencies and especially Bitcoin, where China was leading the global transaction volume, it was getting out of hand.

Kato: How will this impact the market?

Kayamori: Short-term impact is big, but when I say short term, it’s a couple of weeks to maybe a maximum of a month. With the 19th National Congress of the Communist Party of China happening in October, I think there will be some sort of direction. There was always a rumor that the Chinese government wanted to launch their own cryptocurrency. The most important thing is control. They have not shut down the Bitcoin mining facilities where China controls more than a majority of Bitcoin mining. So, this is temporary.

Kato: Some analysts point out that cryptocurrency can lead to money laundering and other problems. Do you think that’s the main reason for the Chinese government’s tougher regulations?

Kayamori: I don’t think money laundering is the single biggest issue for the Chinese government to restrict or ban cryptocurrencies. It's more about control. They want to make sure that they control everything. There’s always ways to move money from mainland China to Hong Kong or mainland China to Singapore. There are agents and they do it with fiat RMB currency. So that always happens. When you look at cryptocurrencies, it's actually easier because it’s traceable. You might not know the actual identity or the name of that individual but you can trace it through the blockchains.

What I think is going to happen eventually is China is going to nationalize cryptocurrency exchanges, or maybe control 2 or 3 of the top currencies, and do it as a national service where they have total control like the Shanghai Stock Exchange or the Shenzen exchange. I think that’s what’s going to happen.

Kato: Let’s turn to Japan. There are new regulations starting this October. What are your thoughts on this?

Kayamori: It’s a double-edged sword. Because Mt. Gox happened in their backyard, it was important for the Japanese government to make sure that that doesn’t happen again and also to protect the end consumer. Japan is the first country that has put in a nationwide or federal level of cryptocurrency regulation for exchanges. It makes a lot of sense, because the money-in money-out, the first mile and the last mile is where virtual currency and cryptocurrency exchange with fiat or national currency. So it’s natural for the government to regulate and oversee the first and last mile.

It’s a blessing, but it’s also a curse. The amount of back-office and mid-office compliance, governance, security, reporting is too much for a lot of startups. The few exchanges that have given up applying for the registration are the ones that unfortunately didn’t have enough resources, and the capacity to become regulated.

Kato: How do you see the potential of the Japanese market?

Kayamori: I think the Japanese market has the potential to be one of the largest retail markets. Japanese retail investors and FX are actually globally number one, because of Mrs. Watanabe — the market’s metaphor for Japanese housewives who are interested in investing in FX. It’s easy to understand, especially for a nation like Japan that is predominantly an export country. The exchange rate between the Japanese yen in US dollars is very close to everybody. So it’s much easier to trade FX than to trade equities, commodities, or bonds. FX is much closer to them. Japan is also the largest country for loyalty points. When you look at Rakuten Point, T Point, all of these coalition programs are very natural to Japanese consumers.

Cryptocurrency is somewhere in between. It is the intersection of foreign exchange and loyalty points, so regardless of the legal definition of what cryptocurrency is, from a retail investor’s view, it’s very natural. It’s a big market and it’s growing.

Kato: What about regulations in other Asian countries?

Kayamori: Singapore is following Japan. Korea is trying to establish them now. The Philippines as well, is looking at it as a money transfer service. They’re looking for inspiration from Japan, best practices. I got a lot of inquiries, and it’s about to happen. Singapore is amending their payments act. It’s very similar to Japan. Japan is also changing its payments act, and this is happening in Singapore. As I mentioned, in the Philippines, they’re looking at it as a remittance, a money transfer service, and they said they will be issuing approval to 2 cryptocurrency exchanges. I think the Bank of Philippines just mentioned that. And Korea, they’ve just announced that they’re going to regulate exchanges as well.

So, this is going to happen and if the government is going to regulate the crypto ecosystem, the place that they should regulate it is the exchanges, because this is the first and last mile. This is where cryptocurrency and national currency exchange, so I would assume within the next 2 to 3 years, every country will regulate cryptocurrency exchanges.

This is one of the most innovative disruptive technologies that has come to the financial industry. So everybody needs to embrace it. That means it’s not only about regulation. It’s about building an ecosystem. We will need to work with banks. We will need to work with regulators. We will need to work with forex brokers. The ecosystem is now changing at light speed.

Kato: Conventional currencies are issued by the central bank or central government. But there is no central issuing body for cryptocurrencies. How can they be managed?

Kayamori: There are many elements when you look at regulation. Do you want to regulate the supply? They cannot control the monetary supply of cryptocurrencies, but they can control when it switches hands with fiat, because fiat is controlled by the central bank. So from their perspective, they want to make sure it’s exchanged properly, through know-your-customer procedures for anti-money laundering purposes.

But what’s going to be interesting is, in the future, there's going to be a day when end-to-end, all the services are going to be done and concluded and paid in cryptocurrencies. It will not touch fiat. So what is the government going to do? I’m sure they’re thinking about it, but they haven’t made any announcements yet.

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