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Self-Regulation in Japan and South Korea has Proven Effective in Domestic Cryptocurrency Markets

Oct 25, 2018

  • Countries across the globe have taken very different approaches to regulate domestic cryptocurrency markets: regulators in China have outright banned cryptocurrency trading and initial coin offerings (ICOs); the European Union and the United States have taken a more traditional regulatory approach by slowly easing regulatory guidelines on the cryptocurrency industry while enforcing pre-existing regulation; and Japan and South Korea’s cryptocurrency market possesses perhaps the most unique regulatory environment, where regulators work alongside a self-regulating cryptocurrency industry group to appropriately regulate the countries’ domestic cryptocurrency markets.  
  • In February, following the USD$530 million hack of Tokyo-based cryptocurrency exchange, Coincheck, Japan’s two largest cryptocurrency industry groups, the Japan Blockchain Association and the Japan Cryptocurrency Business Association, met and agreed to merge to form a self-regulating cryptocurrency industry group. The group’s goals were to enforce self-imposed rules on cryptocurrency industry members in Japan to protect users’ assets, prevent insider trading, and maintain the overall integrity of Japanese cryptocurrency markets. On April 1st, 2018, the newly formed Japanese self-regulating cryptocurrency body officially launched as the Japan Virtual Currency Exchange Association with 16 industry members.
  • The Japan Virtual Currency Exchange Association quickly began imposing guidelines for its industry. In a June 27th, 2018 meeting, the Japan Virtual Currency Exchange Association voted to ban insider trading and to prohibit the trading of cryptocurrencies that are not easily traced -- these include privacy coins like Monero (XMR) and Dash (DASH). During the same meeting, the Japan Virtual Currency Exchange Association voted to require regular audits of Japanese cryptocurrency exchanges.  
  • At a later meeting near the end of July 2018, the Japan Virtual Currency Exchange Association voted to impose a limit on the amount Japanese investors could borrow when trading cryptocurrencies on margin -- the self-regulating body settled on a limit of 4x an investor’s initial deposit.  
  • On October 24th, 2018, Japan’s Financial Services Authority (FSA), the country’s financial regulator, announced that they formally accredited the Japanese Virtual Currency Exchange Association as a certified fund settlement business association -- the new status officially recognizes the Japanese Virtual Currency Association as a self-regulatory industry body and allows it to set and enforce rules for the nation’s domestic cryptocurrency exchanges.   
  • Although the Japan Virtual Currency Exchange Association has not set any official rule since receiving its new status, a Reuters report details that the self-regulating industry group is considering a requirement that cryptocurrency exchanges hold a certain level of separate bank deposits and government bond to ensure that exchanges have enough funds to compensate customers in the event of a hack.
  • Following the proposal by government officials of a blanket ban on cryptocurrencies in South Korea on December 12th, 2017, 33 South Korean cryptocurrency industry members announced they formed the Korean Blockchain Industry Association to self-regulate the domestic cryptocurrency markets. Shortly after its formation, the Korean Blockchain Industry Association established self-regulatory guidelines for its members, including rules to prevent insider trading and market manipulation.
  • On February 23rd, 2018, the Korean Blockchain Industry Association announced they would conduct evaluations of 21 South Korean cryptocurrency exchanges to ensure the exchanges were complying with guidelines established by both South Korean financial regulators and the Korean Blockchain Industry Association.  
  • On April 19th, 2018, the Korean Blockchain Industry Association announced a set of rules to be followed by 14 of its cryptocurrency exchanges. Some of these rules include anti-money laundering provisions, capital requirements, ICO listing procedures, and ethical guidelines. 
  • Self-regulation in both Japan and South Korea has proven to be effective in the last year. The formation of self-regulating industry groups in these countries has led to a strong working relationship between the countries’ regulators and the countries’ cryptocurrency industry members. Going forward, it would not surprise to see the continued formation of self-regulating cryptocurrency industry groups.  Earlier in 2018 in the United States, the Gemini’s Winklevoss twins began the formation of a US cryptocurrency industry group, the Virtual Commodity Association. Now that the Japan Virtual Currency Exchange Association has received official self-regulatory status from Japan’s FSA, we should get a better idea of the implications of self-regulation in domestic cryptocurrency markets -- so far, however, developments in Japan and South Korea have been promising.