Original author: Aki Network/ Aki Protocol

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Behind the Crypto Bull Market – Regulatory Challenges

Despite the sudden collapse of Silicon Valley Bank and Signature Bank, several stablecoins, including USDC, experienced a thrilling "de-anchor weekend". But 2023 will actually be a small crypto bull market for many.”

Bitcoin started the year at $16,500 and recently hit a high of $29,000, an increase of 76%. Many popular altcoins, such as vertical track top players MAGIC and GMX on Arbitrum, have outperformed the broader market.

Developers have also set new milestones one after another - Optimism reached a cooperation with Coinbase, Polygon's zkEVM and zkSyncEra were released, Ethereum passed ERC-4337, Cosmos V 9 Lambda upgraded to replication safety, and so on.

However, this thriving Web3 status quo stands in stark contrast to the regulatory challenges facing the crypto world. Especially after the FTX and Celsius debacles, U.S. authorities are getting tougher on cryptocurrencies.

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Turning East: Japanese Crypto Regulation Is Strict, But Effective

As the rosy outlook for the crypto industry is weighed down by higher interest rates and more regulatory headwinds in the U.S., Web 3 developments are quietly turning: the East is becoming more attractive, especially Japan. Japan has long been at the forefront of the cryptocurrency revolution, and the Japanese government has actively sought to create a robust, regulated environment for the crypto industry since the early days of cryptocurrency development.

In 2014, Japan experienced one of the industry's worst setbacks when Mt. Gox, the world's largest bitcoin exchange, was hacked and collapsed. The incident caused retail investors to lose as much as 850,000 bitcoins. The scandal also underscores the urgency of creating a regulated crypto environment that protects investor funds and maintains market stability. *(This incident highlights the urgent need for a regulated and relatively stable market environment that can protect the safety of investor funds.)

Since then, Japan has begun to implement stricter regulations on the cryptocurrency industry, and has adopted clearer and clearer control policies than other countries such as the United States. In 2017, Japan amended the Payment Services Act to include cryptocurrency exchanges in the scope of regulation and implement a licensing system regulated by the Financial Services Agency (FSA).

The amendment not only made cryptocurrencies a legal form of payment in Japan, but also made Japan one of the first countries to formally distinguish cryptocurrencies from securities. On the whole, the Japanese government has a clear position on cryptocurrency regulation:

• The regulatory framework places a heavy emphasis on protecting consumers, requiring exchanges to separate client assets from their operating funds. At the same time, in order to further protect the rights and interests of investors, at least 95% of the assets of the exchange must be stored in cold wallets.

• The FSA requires exchanges to maintain sufficient capital reserves to ensure that users' rights are protected in the event of bankruptcy. According to a recent interview with Bitflyer, one of Japan's leading exchanges, this reserve needs to exceed the risk exposure by about three to four times.

• The Financial Services Agency requires cryptocurrency exchanges to implement strict anti-money laundering (AML) and customer verification (KYC) procedures to ensure the legality and transparency of transactions.

Japan's sound regulatory environment has given birth to many crypto-friendly banks, such as VC Trading under the SBI Group. Additionally, startups and established businesses alike have thrived on the back of the fiat currency system. The Bank of Japan's upcoming digital yen will also further support the sustainable development of various encryption companies.

In the case of FTX's collapse, Japan's regulatory advantages have been fully utilized. Thanks to the strong regulatory framework, the Japanese authorities were able to step in quickly and effectively protect investors' assets, which made FTX Japan's customers the first to get their funds back.

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Japanese Encryption Exchange Listing Regulations: More Strict, But Successful

Taking a closer look at the regulations governing the listing of cryptoassets on Japan’s central exchanges, we find that the current regulations are more stringent. All tokens to be listed on compliant exchanges in Japan need to be evaluated and approved by the Japan Virtual Currency Exchange Association (JVCEA). The JVCEA is a self-regulatory body responsible for overseeing and enforcing guidelines for cryptocurrency listings and Initial Exchange Offerings (IEOs).

However, the JVCEA review was so thorough and exhaustive that many token issuers gave up listing in Japan.

Recently, although the “green list system” introduced by the JVCEA has shortened the waiting period for listed tokens in Japan from 2 years to 3 months, the listing of new crypto assets in Japan still takes at least a year to complete. The ruling Liberal Democratic Party (LDP) has said that the current JVCEA process has become an "obstacle to the development of Web3 businesses in Japan".

Interestingly, although the JVCEA has approved only three compliant IEOs as of March 2023, they have all been relatively successful:

• PLT (July 2021, Coincheck): Japan's first IEO, token price soars more than 20 times in the first month of listing

• FCR (May 2022, GMO Coin): Token price up about 20% on launch day, but sluggish during bear market in 2022

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The Japanese government's ambitious 2023 Web3 initiative

The scarce token listings and IEOs in the Japanese cryptocurrency community, as well as the great market enthusiasm, naturally make the further relaxation of Japanese listing standards an urgent issue.

In fact, the Liberal Democratic Party's Web3 project team recently officially released their Web3 development white paper, fulfilling the time node mentioned in the draft released in December 2022. The white paper presents an ambitious list of recommendations to advance its "Interim Proposal on Web3 Policy". The draft regards "actively promoting Japan to develop an internationally competitive Web3 business environment" as part of Japan's national strategy. This is a direct response to Prime Minister Yoshihide Suga’s October 2022 announcement of Japan’s official foray into Web3 and the Metaverse.

Several key points of the draft and interim proposals have greatly encouraged the cryptocurrency industry in Japan and overseas, including:

• Require the Japan Virtual Currency Exchange Association and the Financial Services Agency to clarify and quantify the items required for screening and review, making it easier for exchanges and issuers to understand and comply with the process

• Reduce the capital gains tax rate on crypto assets and derivatives from 55% to 20%, and the tax only applies when they are converted into fiat currency

• Promote the issuance and circulation of stablecoins without permission, and Japan plans to issue yen-based stablecoins in April 2023

• Formulate clear guidelines on how to sustainably develop the e-sports and gaming market based on NFT technology

• Promoting the legalization of LLC-type DAOs through special laws

It is worth noting that starting from April 1, 2022, in Japanese Web3 companies, the tokens that are continuously held by these projects will no longer be subject to the year-end tax assessment of unrealized gains. This will bring Japan in line with the world's major economies in terms of Web3 corporate taxation rules. The highly favorable new rules were formally approved by the Liberal Democrats' tax committee in December last year.

In spring 2023, when the Web3 white paper was officially released, the leaders of Japan and the Liberal Democratic Party fully demonstrated their determination to "play an active leadership role in the G7 and clarify [Japan's] position - focusing on the future potential of Web3 as a technology-neutral and Leading advocate for responsible innovation."

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Japanese Encryption Exchange: Developing Web3 and Adding Listed Currencies

In addition to positive government proposals, changes in the exchange landscape are also signaling to the market that 2023 is a good year to be more optimistic about the Japanese crypto market.

Japanese exchanges are poised to gain more market share as global rivals Coinbase and Kraken withdraw from the Japanese market in early 2023. Leading exchanges bitFlyer and Coincheck each claim over 2 million verified users, but given Japan's 130 million population and strong position in the global digital economy and culture, they still have a lot of potential customer base to grow. The small bull market that has continued in 2023 may be an excellent opportunity for Japanese domestic exchanges to gain wider user acceptance.

One of the most straightforward ways for an exchange to attract more users is to list more tradable crypto assets. Coincheck lists only 20 cryptoassets compared to Coinbase’s 200+ cryptoassets. It is foreseeable that with the further simplification of the JVCEA evaluation process, more and more exchanges will seek to list more tokens. Here are some tokens that are expected to have a secondary exchange listing (not the initial secondary market listing) in Japan: ApeCoin (APE), Illuvium (ILV) and Aptos (APT).

While still awaiting positive updates from the JVCEA and FSA, the rise of IEOs will represent Japan's success in strengthening its Web3 national competitiveness. In general, the easier it is for crypto entrepreneurs to legally issue new tokens to fund their projects and communities, the more likely Web3 innovations will happen and stay in Japan. As Web2 giants Softbank, Mitsubishi, Fujitsu, and Nissan aggressively foray into Web3, IEOs and listings on exchange assets will be a viable way for them to expand their network of ecosystem participants crucially.

As an influencer-centric, data-driven Web3 network, Aki Protocol (also known as Aki Network) is proud of the deep connections that our core members in Japan have established with various emerging projects, government agencies, and exchanges in Japan. We've been actively looking for the best Web3 projects in Japan and beyond, and leveraging our huge Japanese fanbase, we've joined hands with projects, communities, and users to accelerate growth. Keep an eye out as we introduce a new wave of Japanese projects and influencers to strengthen our network and give back to our stakeholders.