Japan is another rich developed country where Bitcoin is becoming respectable

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Respectable is a prelude to mainstream. Bitcoin needs to seem normal, legal and safe before it can go mainstream. In this post we look at the signs of that happening in Japan.

Switzerland is another example of a rich developed country where Bitcoin is becoming respectable. Switzerland and Japan also have strong currencies. This is the opposite of the theory that Bitcoin adoption would happen first in countries with failing currencies. Many people were drawn to Bitcoin by dreams of stateless trust based on math replacing more authoritarian governance. So the meme got established that Bitcoin would first go mainstream in countries like Argentina; we debunked that theory here.

Japan is the third largest economy in the world (after America and China), so Bitcoin adoption here is a big deal.

Japan is where we go for some of the early history of Bitcoin. Magic The Gathering Online Exchange became MTGox. From trading cards beloved by nerds, they went to trading a currency beloved by nerds. When MTGox went bust and lots of people lost lots of money, it became a byword for the lawless dangerous world of Bitcoin.

That could be the end of the story, but it turns out it is only the first chapter. In chapter two, Japan has made three moves to encourage Bitcoin adoption:

  • Regulated Exchanges
  • Legal currency status
  • Elimination of sales tax

This has led to some good business results:

  • No 2 in trading volume
  • 5,000 merchants accepting Bitcoin
  • Strong VC funding (in a generally weak environment)

Regulated Exchanges and Insurance

The MTGox failure was explained by a simple old fashioned problem – commingled accounts. When you buy IBM shares on NYSE, you don’t worry that the NYSE can get your IBM shares. That is an easy fix; but it still needs to be policed/regulated.

In 2016, Japan passed a bill that mandates that virtual currency exchange operators have to register with the Japanese Financial Services Agency and submit to on-site inspections and KYC practices.

This level of regulation encourages insurance companies to step up the plate and offer insurance to bitcoin exchanges (a subject we first covered in this post).

Mitsui Sumitomo Insurance cover ranges from ten million yen (US$88,500) up to one billion yen (US$8.85 million). It also covers loss from internal and external threats, including employee theft, mistakes, cyberattacks, and other unauthorized access.

The first customer is Japan’s largest bitcoin exchange, Bitflyer. By working with a highly professional exchange, Mitsui Sumitomo Insurance can also offer best practice advice. After a number of bitcoin exchange blow ups, the best practices are now well established. If a bitcoin exchange follows these, the risk of loss goes down (which is good for the Insurer) and being insured will help bitcoin exchanges to gain consumer confidence.

Fear of getting ripped off is no longer a deterrence to bitcoin trading. Now it comes down to standard risk/reward calculations that traders make every day. Today bitcoin offers two things that traders love – volatility and wide spreads. However, none of this could happen until the exchanges became safe.

Legal Currency status

The new law defines bitcoin as a legal currency that can be used to make payments and an asset that can be transferred digitally. That is simple but game-changing. You may pay for illegal things using bitcoin, but the currency itself is just as legal as a suitcase full of cash in a parking lot.

No sales tax

Later in 2016, Japan defined plans to drop sales tax on Bitcoin.

This is not yet a done deal, but could take effect as early as July 2017, according to CoinDesk. This means customers don’t have to pay tax for each transaction. This is similar to the early days of e-commerce when no sales tax was levied. This will make paying with bitcoin more attractive, by making it cheaper for the buyer and lower admin for the seller.

So much for what has been done to encourage adoption, here are the signs are that adoption is happening:

  • No 2 in trading volume
  • 5,000 merchants accepting Bitcoin
  • Strong VC funding (in a generally weak environment)

No 2 in trading volume

While China is easily the leader in Bitcoin trading volume, Japan is the silver medalist. As in China, a lot of the volume can be attributed to the fact that Bitcoin trading on exchanges is zero cost in China and Japan, encouraging frenetic trading that does not mean that much. Many say that real volume is less than 30% of headline volume.

While the trading volumes may be misleading, there is a wall of money ready to move into bitcoin trading if Mrs Watanabe steps seriously into the game. Mrs Watanabe is the archetypical retail investor in Japan. Culturally, Japanese retail investors have sought safe investment options. However, perpetually low interest rates since the 1990s led many to become active in the carry trade (in which investors borrow a low-cost currency like the yen and buy high-growth currency, netting a profit). It is a short step from that to trading in bitcoin, which is attractive to traders because of volatility and wide spreads.

The real proof of the bitcoin pudding is whether it is being used to buy and sell goods and services.

5,000 merchants accepting Bitcoin

Today more than 5,000 merchants and websites in Japan accept Bitcoin as payment.

We still cannot see merchant transaction volume, a subject we covered in our latest bitcoin ecosystem health check.

Some speculate that the Olympics, due in Tokyo in 2020, will give bitcoin a boost as visitors can pay in bitcoin rather than converting to Yen. This is where the sales tax could be critical.

Strong VC funding

In a generally weak environment for bitcoin VC deals in 2016, Japan saw two significant deals – bitFlyer and Techbureau.

bitFlyer

The third largest VC investment in 2016 happened at the end of April for US$27 million to Tokyo-based Japanese bitcoin exchange bitFlyer. It was a Series C round, bringing their total funds raised to $33.94 million. Investors include Venture Labo Investment and SBI Investment.

TechBureau

TechBureau, which operates a bitcoin exchange called Zaif and a permissioned blockchain platform named Mijin, raised $6.5m in a Series A. Participants in the round included Arara, a financial services firm; online information portal OKWAVE; VC firms Nippon Technology Venture Partners and Hiroshima Venture Capital; and FISCO, a corporate analysis firm. TechBureau bill themselves as a ‘Crypto-FinTech Laboratory.’ Many Japanese startups and projects were born in the lab including the popular Zaif bitcoin exchange.

Regulation does matter – ask Coinbase

Compare Coincheck which has the lion’s share of bitcoin merchant processing in Japan to Coinbase which has that position in America.  While Coincheck operates in a relatively benign regulatory environment, Coinbase is in legal battles with the IRS.

The key part of merchant processing is off ramp ie converting to Fiat. This a function of an exchange. Lots of traders also make for liquidity and price discovery which will be good for merchant adoption and mainstream use. So the Japanese focus on exchanges makes total sense.

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