To hear about FinTech and cryptocurrencies in Japan, this month Finance Monthly reached out to Kenji Hoki, Deputy Head of FinTech Promotion Support Office at KPMG Japan, who provides advisory services on financial regulations to financial institutions, as well as FinTech start-ups in Japan.
What have been the hottest topics in relation to FinTech in Japan in the past 12 months?
Not only in Japan, but globally, cryptocurrencies or virtual currencies have been what everyone’s been talking about recently. In Japan, they have been in the spotlight for a broad range of parties, including retail investors, FinTech start-ups, major financial institutions and authorities like financial regulators and central banks, while attitudes towards cryptocurrencies are varied across the sectors.
Retail Investors in Japan who trade cryptocurrencies are rapidly increasing and expanding their investments.
FinTech start-ups like a provider of personal financial management and marketplace to trade goods between users are seeking opportunities to incorporate cryptocurrencies as a mean of payment in enhancing their competitiveness.
Critical characteristic of the cryptocurrencies, when compared to traditional banks, is bypassing bank accounts to transfer money and the potential to disrupt their position in the financial industry. Large banks in Japan have plans to issue their own digital money, which can keep money flow via the account. In this context, Bank of Japan is conducting joint research with ECB on cryptocurrencies.
Japan has taken a very unique approach to emerging cryptocurrencies and has become the first country to give them legal status. The amendment of Payment Services Act (PSA) came into effect in April 2017, introducing new regulations that require virtual currency exchangers to register with the Financial Services Agency prior to setting up their exchange business.
What are the key recent developments in relation to cryptocurrencies?
Based on the amended PSA, 16 virtual currency exchangers were registered and are now subject to the regulations, while a lot of potential virtual currency exchangers are in the process of obtaining the status and are on the cue to register.
These companies include not only business operators that provide exchange services, but also various institutions, such as traditional financial institutions (banks, brokers, etc.), non-bank payment service providers, foreign virtual currency exchangers, etc. This increased interest to register highlights the potential of cryptocurrencies to become a business tool that can enhance the offerings of ordinary companies, which are not financial institutions.
New regulations have forced certain virtual currency exchangers that re not able to meet the registration criteria to close their business before the revised PSA came into effect.
As the cryptocurrency sector evolves rapidly, a study group from the Financial Council has started discussing a fundamental transformation of the regulatory frameworks in Japan – from focusing on entities like banks, securities companies, asset managers and insurance companies to functions like payments, finance and risk transfers, as well as redefining basic financial terms such as ‘money’, that will need adding ‘cryptocurrency’ to them.
Last but not least, global discussions on cryptocurrencies might affect the regulatory approach in Japan. In fact, coordinated regulations on cryptocurrencies are likely to be a priority on the global agenda for 2018. Discussing and considering how to face and use the cryptocurrencies, as well as fiat currencies, plays a new role in the future eco-system in the financial sector.
What would you say have been the best inventions of 2017 around the cryptocurrencies on an international level?
I would like to stress that these opinions are my own, and not the views of KPMG Japan.
Initial Coin Offering (ICO) could be a game changer at an international level, when it comes to shifting means of fund raising and hence, change the financial market/products (such as stocks) dramatically. A fundamental feature of ICO is to provide a broad range of parties an easier access (not easier money) to means of fund raising, in particular those who could not have had such access before ICO, including NPOs, start-ups, projects and even a divisions of a company.
These organizations and units who have had limited access to raise funds in the current financial markets can now benefit from fund raising via ICO and may facilitate innovation not only in the financial sector but in other sectors and markets too.
What have been the impediments on cryptocurrencies in Japan?
In facilitating business treating and/or using cryptocurrencies, many rules, other than regulations need to address cryptocurrencies. For example, accounting and auditing standards need to be reviewed to fit into this new environment and tax needs to be looked at too.
Furthermore, the regulations are still trying to keep up with the change. The above amendment of the PSA does not address ICO. As the sector expands continuously, differentiating digital currencies, including cryptocurrencies and fiat currencies, may be the next focus of the Financial Council and other similar organisations.
What does 2018 hold for cryptocurrencies in Japan?
Digitization in the financial sector will enter a new phase that will challenge the established systems. Banks will accelerate consideration or development of digital currencies which would be issued by themselves in order to keep the money flow in their hands.
Cryptocurrencies will be used more as a mean of payment from the current status, as opposed to an asset to invest in, while many FinTech start-ups that sell non-financial products/services are considering to add cryptocurrencies to their business model and expand the business in order to meet with users’ needs.
Token will be used more broadly to digitize existing non-financial products, while certain disciplines to sell Token without regulated intermediaries need to be introduced to the market. Distributed ledger technology might support the movement to replace certain goods like paper-based certificates with digital Token.
Any final thoughts?
In a digitized society, personal data and user interface is a critical source of competitiveness since every company, including financial institutions, has to customize its product and/or services to meet their users’ needs.
Meanwhile, digitization tends to remove the process of intermediation to deliver the products/services and payment, and bring old-fashioned processes to exchange directly between end-users.However, there’s the possibility of it falling apart both physically and electronically.
Until recently, it was impossible to transfer monetary value without trusted intermediaries and repositories who use expensive IT system and comply with strict regulations. However, distributed ledger technology enables the end user to do so directly by using cryptocurrencies as a mean of payment as well as Token as a digitized product/asset.
Financial authorities need to face that regulating intermediaries to be bypassed is not appropriate any longer in protecting users and markets.
Financial institutions need to know the above irreversible transformation and change their business model fundamentally and rapidly in order to keep up with an environment where personal data and user interface move to platformers to provide marketplace to users to exchange goods/services and monetary value instead of intermediaries.