What’s wrong? The Movement to Regulate Crypto Assets is Accelerating

Even services that are known to be useful may not be popular due to various concerns. Cryptocurrency assets such as Bitcoin are one of them.

Cryptocurrency assets are used as money or traded as investment products all over the world, but governments are showing regulatory movements. What’s wrong with crypto assets and how are governments trying to regulate them?

Central Bank Digital Currency (CBDC) is also involved in this field, so the composition is complicated.

US Regulations: Will Bitcoin ETFs Be Born?

The US government is moving to tighten regulations on crypto assets (* 1). The US government has decided to put the person who taught crypto assets at the Massachusetts Institute of Technology at the top of the Securities and Exchange Commission. The person has a stern eye on financial markets, nicknamed the “regulatory professional.”


Is Bitcoin Still Risky?

A major feature of crypto-asset regulation in the United States is whether to allow Bitcoin exchange-traded funds (ETFs). Regulators are reluctant (※1).

Once Bitcoin ETFs are approved, institutional and individual investors will be able to easily trade in the market, like stocks and investment trusts. Since the value of Bitcoin will increase further when it is converted to ETF, the crypto asset industry is longing for ETF conversion.

Bitcoin’s ETF conversion is also good for financial markets.

If Bitcoin ETFs are realized, short selling will be possible, and investors will be able to increase price reduction pressure. Bitcoin prices have so far surged as a long-term trend, although they have been temporarily plunged due to disappointment. That is because there was a strong belief that it would be “profitable.”

In other words, Bitcoin does not move according to the market mechanism, and there is a part that seems to be out of control. Once ETFs are used, Bitcoin prices will be controlled by the market, making it a healthier investment product.

So why are US regulators cautious about Bitcoin ETFs?

One of the reasons is that Bitcoin is too speculative(※2). The US Securities and Exchange Commission warns that investors trading Bitcoin will take more risk than they are aware of.

“Risks beyond what we are aware of” are very scary. Investing comes with risks, but investment products with far greater risks than expected can no longer be gambling and can shake the market.

This means that Bitcoin is still a dangerous entity to qualify as a regular investment product.


How to bring ETFs and underlying asset prices closer

Bitcoin is now in a complex situation where 1) it can be a healthy investment product if it is converted to an ETF, but 2) it cannot be converted to an ETF due to the excessive risk that Bitcoin has.

So what does it take to overcome this situation? How can Bitcoin be an ETF and a healthy investment product?

The answer is to increase the link between ETF prices and underlying asset prices.

When the Bitcoin ETF is born, its price should be linked to the price of the underlying Bitcoin asset. “The price of the underlying asset of Bitcoin” is the price of Bitcoin itself.

For example, the price movement of gold ETFs moves almost in tandem with the price of the underlying asset of gold (gold itself). The price movement of the Nikkei 225 ETF is also almost linked to the Nikkei 225 amount. However, the price of Bitcoin ETFs and the price of Bitcoin’s underlying assets can be significantly different, as Bitcoin can still be “speculative” and violently priced.

To overcome this situation, it is necessary to improve the market for crypto assets, strengthen the financial base of those who participate in transactions, and ensure thorough compliance.

Unless crypto-assets can be turned into “ordinary and legitimate investment products”, it is not possible to release them into the “sea” of the market because it is not known when the “fry” of crypto assets will transform into “monster fish”. That is.

Government of Japan Concerns

Next, let’s look at Japanese regulations.

The Financial Services Agency of Japan is also very cautious about crypto assets and is calling on the public that “price may plummet and loss may occur”(※3).

It is extremely unusual for the government to name a particular investment product and say “loss”. From the perspective of the company that handles the investment product, it is like being disrupted. No matter how weak the word “potential” is, the word “loss” has a strong impact, and some may confuse it with “the country says it’s better not to buy crypto assets.”

The Financial Services Agency recommends general investment products such as stocks and investment trusts to the public, so caution against crypto assets is even more pronounced(※4).

The FSA is concerned about the plunge in crypto assets, which is the same as the US Securities and Exchange Commission warning that Bitcoin poses far more risk than expected.


Administrative Sanctions Actually Taken by the Financial Services Agency

The Financial Services Agency not only calls for caution but also actually imposes administrative sanctions(※5).

Since company A, a crypto-asset-related company in Nagoya City, is not fully compliant with the “Guidelines for Money Laundering and Countermeasures against Terrorist Financing,” the Financial Services Agency has given the company a business management system and money. We have issued a business improvement order to establish a risk management system for laundering and terrorist financing.

In addition, the Financial Services Agency has issued nine business improvement orders to the crypto asset-related company B in Osaka Prefecture, saying that management lacks awareness of legal compliance.

Among the nine items, there were also extremely basic matters such as establishing a management system for books and documents.


Chinese government regulation

The Chinese government has a strategy to regulate private crypto assets while promoting the Central Bank Digital Currency (CBDC). CBDC is a public digital currency backed by the government and the central bank.

In May 2021, the China Internet Financial Association, the China Banking Association, and the China Payment Clearing Association banned financial institutions from providing crypto-asset services. We also warned the Chinese people not to make speculative transactions on crypto assets(※6).

There are three reasons to regulate crypto assets: 1) prices are skyrocketing and plummeting, 2) they are infringing on the security of people’s property, and 3) they are disrupting economic and financial order.

The Chinese government is making efforts to popularize it by presenting tens of millions of RMB worth of digital RMB to the people. One yuan is about 17 yen, so tens of millions of yuan are on the scale of hundreds of millions of yen.

From a disappointing point of view, the Chinese government can be thought of as regulating its rival crypto assets to make the digital yuan easier to circulate.


If You Look at the BOJ’s Stance, You Can See it in a Different Way.

I mentioned earlier that the Government of Japan is wary of crypto assets, but the Bank of Japan’s stance gives a different perspective.

The Bank of Japan, the central bank of Japan, started a CBDC demonstration experiment in April 2021(※7). The purpose of the experiment is to explore the feasibility of the basic functions of the CBDC, examining the issuance, remittance, and remittance of the CBDC. Repatriation is a phenomenon in which the CBDC issued by the Bank of Japan returns to the Bank of Japan.


Bank of Japan Has a Clear Vision

Then, it seems that the Bank of Japan will not issue a CBDC in the near future, and has declared that it has no plans to issue a CBDC at this time(※8).

So, of course, there is no such thing as conducting a CBDC experiment from a mere inquisitive mind, and the Bank of Japan highly evaluates the potential of digital currencies as follows.

  • Social needs for the CBDC may rise sharply
  • CBDC preparation is important to stabilize the entire payment system
  • CBDC can play a role as a payment method along with cash
  • The CBDC can be the basis for private sector innovation

The Bank of Japan also has a clear vision for the Japanese version of the CBDC, which is a two-tiered structure of private banks and the Bank of Japan.

Individuals and Businesses: CBDC users  
↑ CBDC ↓  
Private Bank: Providing Specific Services This is a two-layer structure of private banks and the Bank of Japan
↑ CBDC ↓
Bank of Japan: Designing Service Foundations and Materials

The Bank of Japan designs the foundations and materials for CBDC services and provides them to private banks. Private banks use foundations and materials to create concrete and convenient services to provide to CBDC users such as individuals and businesses.


The composition of the brake on crypto assets and the accelerator on the CBDC is the same

Having a concrete vision so far, it is hard to imagine that the implementation of the Japanese version of the CBDC does not exist in the “head of the Bank of Japan.”

In that case, the FSA’s regulation of crypto assets and the BOJ’s consideration of the CBDC overlaps with China’s push for the digital yuan while restraining crypto assets.

Summary – The Offense and Defense Will Continue for a While

Cryptocurrency is a promising financial system, a payment method, and a good computer service. These factors create great business opportunities. For that reason, a large amount of money is now being collected in various crypto assets such as Bitcoin.

While welcome, these trends are dangerous for governments and central banks.

We welcome business activity and the country’s economy, but we must avoid instability in financial markets, financial systems and financial services. As a result, all countries are moving to regulate crypto assets, albeit with different strengths.

And central banks are keenly interested in CBDC to absorb the future of digital currencies. The “offense and defense of crypto assets and CBDC” competing for supremacy in the digital currency field is likely to continue for a while.