Lessons learned on the path to better regulation
Japan and South Korea are both massive markets for cryptocurrencies. However, regulation in each country has decisively shaped the evolution of the industry. As more countries around the world recognize the need to create better standards in consumer protection and technological development, it’s worth considering what we can learn from these two Asian crypto giants.
Japan Leads the Way
When the Japan Financial Services Agency (JFSA) moved to implement the regulation on cryptocurrencies in early 2017, the biggest concern was what this would do to innovation. Memories were still fresh of the effect of New York’s BitLicense fee. This was launched in 2015 and saw the exit of prominent bitcoin companies in the State.
Regulation in Japan has been an ongoing tightrope act to balance necessary consumer protection with actual growth and development. Incidents such as the Coincheck hack in January 2018, where more than USD500 million was lost, have meant the JFSA has been forced to take the hard road.
This has significantly shaped the industry in the country:
- It is extremely difficult to promote new projects in Japan. Over the last two years, Japan has gone from being one of the most active ICO markets to an ICO no-go zone. In fact, the last fully licensed ICO in Japan was in late-2017 when we at Quoine raised USD105 million in the QASH ICO. The irony is that Japanese citizens themselves cannot participate in ICOs, so while ICOs technically have not been banned, regulations are so tight and disincentives so strong that it is virtually unheard of for domestic or foreign projects to launch in Japan.
- Authorities have been very conservative in their selection of coins for their approved whitelist. This makes it difficult for businesses to experiment with altcoins and native tokens. The move away from altcoins is evidenced by the fact that in September 2017, Japan rose above the US as the biggest market for Bitcoin trading volume.
The shortcomings of one country, however, are the stepping stones of another. South Korea does not lag far behind when it comes to cryptocurrency regulation. While the path has been littered by confusion and misinterpretation from the side of both regulators and the public. Recent developments reveal that this country might just be the next Asian crypto hub.
A History of Crypto Regulation in South Korea
1. From bans to booms
In September 2017, the South Korean government proposed market reforms that included a blanket ban on ICOs. Then in January 2018, conflicting media reports lead to confusion after a South Korean minister announced plans to extend a ban to all cryptocurrency trading. Within days, the price of Bitcoin on local exchanges plummeted 21% down to $17,064 – a price still far higher than the global average at the time ($13,501).
To put things in perspective, South Koreans represent nearly 30% of all crypto trading worldwide. Not only did the market show its full force in numbers, but over 200,000 citizens signed a petition renouncing the latest measures of regulation, asking the government not to ruin their “happy dream” and proposing some of their own recommendations. One petition that garnered 30,000 signatures even called for the justice minister to resign.
2. Testing the waters
2018 has seen some promising developments in the Korean government’s stance towards cryptocurrencies and blockchain technology. Most notably, unlike Japan, the Korean government has drafted a policy that recognizes the entire ecosystem. Not including just trading and exchanges, as one that is legitimate. In July 2018, a new industrial classification system officially recognized cryptocurrency exchanges as legal entities and categorized the “blockchain industry” into three main subsections:
- “Software development and supply businesses”: this includes decentralized application platforms like Ethereum
- “Computer programming, system integration, and management”: this includes mining-related activities
- “Blockchain technology-related hosting service industries”: this includes cryptocurrency exchanges
These classifications are pivotal for the development of the entire industry. Because they mean that any future policy must be drafted with an awareness of its effect on other areas.
Already, the government has launched a “restructuring plan to lead financial innovation in the coming Fourth Industrial Revolution era”. This includes an agreement with China and a plan to revitalize the country’s investment incentive system. As well as adding blockchain to the list of emerging technology eligible for tax benefits. $1 trillion won ($885 million) has been pledged for development of select technologies, including blockchain, in 2019 alone. Furthermore, the Blockchain Technology Development Strategy aims to raise approximately $207 million by 2022.
The common trend: More Transparency, Less Supervision
Only time will tell whether Korea’s efforts can pave the way for a more innovative and developer-friendly crypto climate.
Japan has struggled to regain its status as a crypto haven due to the hacks that occurred even after stringent regulation was put in place. Furthermore, South Korea faces similar issues on a more frequent scale. The lesson learned here is that better compliance does not always translate to better security.
But it seems that South Korea’s slow move to crypto regulation has actually worked in its favor. Up until recently, the grey area around ICOs meant that projects were still willing to experiment in the country. Therefore there is now a strong developer community whose presence has been formally recognized by the government through recent policy revisions.
The Japanese Currency Association
Both countries are learning that while consumer protection is necessary, this cannot happen at the expense of growth and development. On 24 October 2018, the Japanese Financial Services Agency (JFSA) announced that it would allow the Japan Virtual Currency Association (JVCEA) to oversee regulation of the cryptocurrency industry in the country. Essentially allowing for a form of self-regulation.
The question now remains which of these two countries will be able to balance growth and innovation with protection and compliance. The climate for crypto regulation varies worldwide. However for countries with populations that have such huge appetites for trading and speculation, better regulation is a must. We can only hope that “better” translates to more progressive, more effective, and ultimately more innovative.
This article was first published on Liquid Exchange’s blog here.