This past Friday, financial regulators in Japan began on-site inspections of 16 digital currency exchanges — two weeks after hackers stole $530 million in NEM tokens from Tokyo-based cryptocurrency exchange Coincheck, the largest virtual coin heist in history.
Despite this heist — and concerns over lax security at other exchanges — regulators, investors, and enthusiasts in the country have not been deterred. While China has banned cryptocurrency exchanges outright, reportedly because the government intends to create its own digital currency, and South Korea has outlawed anonymous transactions, the Japanese government has embraced the blockchain phenomenon.
The government believes it can take the lead in the regional cryptocurrency race, which it hopes will drive economic growth and bring the government a hefty sum in taxes. According to one estimate, the government could benefit to the tune of Y1 trillion, or $9.2 billion, a year.
And it’s not just the crypto community and the state, Japanese companies are increasingly accepting payment in digital currencies, with over 10,000 companies already accepting Bitcoin instead of cash, including Peach, the nation’s largest budget airline, and electronics retailer Bic Camera. Further, the eighth-largest bank in the world, Tokyo-based Mitsubishi UFJ Financial Group, is developing its own cryptocurrency.
The problem, demonstrated by both the recent Coincheck heist and also the February 2014 hack and subsequent collapse of Mt. Gox Bitcoin exchange in Tokyo, is that regulators are playing catch-up in a quickly developing industry. As such, some exchanges have been permitted to remain vulnerable. In the case of Coincheck, the NEM coins were stored in a “hot wallet” instead of the more secure “cold wallet,” which operates on platforms not directly connected to the internet. Coincheck also didn’t implement an extra layer of security known as a multi-signature system.
“Innovation has been so fast that the government and bureaucrats until recently did not understand the functions of the blockchain or what a ‘cold wallet’ or a ‘hot wallet’ is,” said Ken Kawai, a partner at the law firm Anderson Mori & Tomotsune — who are serving as cryptocurrency advisers to the government. “Japan’s financial regulators are traditionally very conservative and never the first to move, but that has changed and Japan wants to be friendly to fintech,” he said. “It is just that nobody expected it to happen this fast.”
“I see a lot of energy and enthusiasm for cryptocurrencies here, despite what has happened,” said Scott Gentry, founder of the FreeAbound business development consultancy in Tokyo. “In the Coincheck case, the owner was told that he needed to have multi-signature security protocols in place, but he claimed he ‘never got around to it’, which is simply dereliction of duty to his clients.” This could be an example of gross negligence on the part of Coincheck; other Japanese exchanges have also been accused of irresponsible advertising.