TOKYO, Japan is fast turning into the world's top haven for cryptocurrencies, drawing benefit from a broader clampdown in China and South Korea on the main digital currency, bitcoin.
Authorities in Tokyo are walking a tightrope between protecting consumers and preserving Japan's own reputation for innovation. But some fear the reluctance to tighten the rules on bitcoin trading could expose the country to financial risk.
Governments around the world, especially in Asia, are clamping down in the face of wild price swings that can distort flows of funds and create instability in the financial system. Scams, tax evasion, money laundering and terrorism financing are all concerns as well.
Japan was an early adopter of cryptocurrencies, recognizing them as a valid payment method last year. Now it appears to be the world leader for bitcoin trading, with yen-bitcoin transactions now accounting for 40% of the global total.
The ratio may rise further if more traders exploit Japan's looser regulations, though Tokyo insists it maintains adequate safeguards for investors and consumers.
Takahide Kiuchi, an executive economist at Nomura Research Institute who resigned from the Bank of Japan's policy board last year, said crackdowns on virtual currencies overseas have "led to moves to transfer investment money to Japan, where regulation is relatively slack."
This "regulatory arbitrage," as industry insiders call it, is akin to the wealthy parking money in offshore tax havens.
"I don't think it is good to regulate anything and everything"
Japanese Finance Minister Taro Aso
Unlike international money transfers between banks, which charge high commissions and take considerable time, digital tokens can be sent instantaneously like email messages. If investors in South Korea want to trade in bitcoin, they can do so simply by sending digital tokens to their acquaintances in Japan.
While this can spur trading and contribute to the growth of platforms and other related businesses in Japan, the country may be exposing itself to the same risks its neighbors fear.