Asian regulators hope to contain cryptocurrency risk but may be fanning flames

Bitcoin has found unlikely allies in Asia: regulators. Japan and South Korea now make up some half of global trading in the $300 billion market. Tokyo has officially recognized Bitcoin and cryptocurrency exchanges, and Seoul is mulling doing so as well. Such regulation is an effort to contain risk but also encourages acceptance and increases the allure of this untouchable cash.

The price of Bitcoin, the most wellknown and largest digital currency, has surged 1,556 percent this year to top $16,522. Financial institutions remain wary of Bitcoin’s wild swings but there is explosive demand from stay-at-home retail traders in Japan and South Korea: yen and won-based trading account for 51 percent of the global total, estimates Coinhills. Exchanges that let users buy, sell and store digital money are booming. Seoul-based Bithumb, for instance, is one of the world’s busiest platforms, shifting almost $5 billion of trades a day, according to CoinMarketCap.

Yet globally most exchanges are unregulated, offer little investor protection, and are frequently targeted by thieves. Earlier this week, a South Korean exchange collapsed after it admitted being hacked. In the US, only some states like New York require licenses for businesses involved with crypto-currencies. Bureaucrats in Tokyo and Seoul, by contrast, are legitimizing virtual trading. Japan in April allowed the use of crypto-currencies as a means of settlement. Digital currency outfits there must conduct annual audits, meet capital requirements and enforce anti-money laundering measures. South Korea is now considering similar legislation; it is also proposing a capital gains tax, following Japan’s move to impose one in September. Satsuki Katayama, a lawmaker from Japan’s ruling Liberal Democratic Party, told a Breakingviews Predictions event in Tokyo she welcomed market oversight from Japan’s Financial Services Agency.

These measures could have unintended consequences. Japan’s new laws probably fuelled speculation: Trading at major Japanese exchanges has surged since April. In the effort to contain risks, Asian authorities are fanning the flames.