The first topic of conversation on every business conference call these days seems to be the C-word (covid-19 or coronavirus, of course). Covid-19 has dislodged another C-word that was common talk just a couple short years ago, i.e. Crypto.
With the recent steep declines in global stock markets (and as an aside I’m still not personally convinced that covid-19 is fully priced in yet), there have been corresponding slides in other supposedly uncorrelated or anti-correlated assets, like gold and, arguably, even cryptocurrency. Why the corresponding sell-offs ? To address this question, I point to the wisdom of Matsumoto-san, CEO of Monex Securities in Japan (read: There’s only one market).
Today though, I’d like to write about cryptocurrency from a different angle… specifically, the dynamic regulatory environment governing cryptocurrency in Japan.
As anyone doing business in Japan knows all too well, March 31 marks the end of the fiscal year for the Japanese government and most companies. This means that at the beginning of April, usually when the cherry blossoms are in full bloom along with the spirit of renewal ushered in by the arrival of spring, the Japanese government also revisits and renews regulations.
Regarding cryptocurrency, one of the most radical regulations introduced a couple of years ago involved the rather stringent requirement that any cryptocurrency exchanges serving consumers in Japan must obtain a special cryptocurrency exchange license (more color in ICOs in Japan revisited).
Now in 2020, starting next month enhanced regulations governing cryptocurrency in Japan should take effect. The new legislation will define financial assets related to cryptocurrencies, implying a delineation on which parties can offer products on such financial assets.
Leveraged products, options, CFDs, and other derivatives on cryptocurrency will be defined as financial assets under the new legislation, and thus fall under the authority governing such assets (the Financial Instruments and Exchange Act), which is different from the legislation governing cryptocurrency exchanges (the Payment Services Act). In short, broker-dealers will be able to offer products based on such cryptocurrency derivatives. They will not, in contrast, sell cryptocurrency directly. The minute they were to touch the underlying cryptocurrency itself, then the cryptocurrency exchange license requirement would kick in, along with all the associated KYC/AML compliance obligations under the Payment Services Act.
Conversely, cryptocurrency exchanges, who already bear the burden of KYC/AML compliance since they sell cryptocurrency directly to consumers, will not be able to sell derivative products on cryptocurrency, at least per my current understanding of the prospective legislation.
This creates an interesting bifurcation. Consumers who would like to buy bitcoin directly, for example, would continue to purchase it on the cryptocurrency exchanges as they have been doing presently. However, traders or even slightly sophisticated investors who are interested in crypto derivative products, will need to go through broker-dealers. Broker-dealers comprise established financial institutions in Japan, just like in other countries, having undergone substantial licensing, compliance, and balance sheet rigor.
Granted, today most cryptocurrency transactions tend to involve the purchase or sale of the underlying cryptocurrency itself. However, if you believe like I do that over the long term, derivative products on cryptocurrencies will surpass direct trading of the underlying crypto assets, then this new regulation portends a difficult road ahead for the pure-player cryptocurrency exchanges in Japan.
