Welcome to Part 2 of my report on cryptocurrency’s status in Japan. My previous post summarized Japan’s current regulatory atmosphere and explained why cryptocurrency is still not considered “legal tender” in that country. In this installment, I’m going to take a closer look at the overall support for cryptocurrency in Japan, and the status of its adoption.
Government support, or just a smart strategy?
While the Japanese government deserves credit for having a forward-thinking attitude towards cryptocurrency, it’s important to recall the events that shaped such an attitude. In 2014, a Japanese cryptocurrency exchange named Mt. Gox declared bankruptcy after revealing that someone had pilfered 850,000 bitcoins from it over several years. As the most significant security breach to ever hit cryptocurrency (at the time), the theft severely weakened the public’s confidence in bitcoin. However, rather than support the industry, the government’s knee-jerk reaction was to quickly impose several new regulations. At the time, Mineyuki Fukuda, a former Liberal Democratic Party lawmaker responsible for crafting such laws, was quoted as saying “if it weren’t for Mt. Gox, I wouldn’t have been involved with Bitcoin regulation at all”.
Economic considerations were likely the only reason that Japan didn’t slap an outright ban on cryptocurrencies following this disaster. More cynical observers believe another motivation was the realization that cryptocurrency could make Japan “cool” again. Japan’s glory days of strong economic growth and world-beating innovation that gave birth to the Sony Walkman, Nintendo Gameboy, and instant noodles have long been a thing of the past
Respondents to my survey were heavily in agreement. Over 70% of survey respondents felt that the Japanese government remains non-supportive of cryptocurrency adoption, which was very surprising to me. At first, I hadn’t even included that option as an answer, since everything I had read online had indicated otherwise. However, after the first few respondents reported otherwise,
One respondent opined that the government’s primary focus was “not aiming to promote the technology, (merely) prevent any crime and bankruptcy caused by speculative investing.” Another respondent asserted that the government “does not possess the capability to adequately regulate cryptocurrency.”
Fear the taxman
In Japan, profits made from trading cryptocurrencies fall under miscellaneous income. This classification means the government will add any earnings received as regular income, with your tax burden calculated from that total. For high earners, this can push your tax rate up to 55%. However, being miscellaneous income, losses cannot be carried forward to the next year, nor can losses be deducted from other types of income. In contrast, profits from trading stocks, on the other hand, are taxed at a flat 20%.
During Japan’s Upper House budget committee meeting in June, a Japanese lawmaker asked the Deputy Prime Minister if cryptocurrency profits could be taxed in the same way as stocks. Unfortunately, the minister expressed doubt that the public would be sympathetic to such a change – as the broader population views cryptocurrencies as merely a tool for speculation.
A relatively large percentage of the world’s bitcoin trading volume is paired with the yen, and Koji Higashi believes that a small concentration of investors with large orders comprise most of it. Thus it’s likely that a reasonable number of people are getting slugged with this overwhelmingly high tax rate (assuming they haven’t already left the country).
This unfair tax treatment isn’t exactly what one might expect from a country considered a “crypto haven” by investors. Instead, it lends weight to the notion that Japan is playing a quite strategic game regarding taxation revenue.
Cryptocurrency: a business chance
Japanese businesses have quickly taken advantage of bitcoin’s popularity. According to the Japan Cryptocurrency Business Association, roughly 52,000 vendors across Japan support payment via bitcoin. Kohei Kurihara, president of the Tokyo Chapter of the Government Blockchain Association, points out that these vendors are mostly small shops or internet businesses. Despite vendor support and adoption, major electronics retailer Bic Camera recently revealed that less than 1% of all store purchases were made with bitcoin last year.
When asked why Japanese vendors are actively adopting cryptocurrency as a payment option, nearly half of my survey respondents indicated that such vendors merely saw a business chance. They were not notably aware or interested in blockchain’s technological merits. Roughly 30% of respondents asserted that businesses are not adopting it, indicating that adoption isn’t as widespread as the media would have us believe.
From these responses, we can glean that there’s still a long way to go before cryptocurrency is considered mainstream among the public in Japan.
Growing consumer support can be challenging in a stagnant, aging society.
Many people consider Japan a technological wonderland; perhaps because electronic gadgets are quite commonplace. Or perhaps its because the country relies on an amazingly fast and reliable train system. Despite this image, there’s also a side of Japan lagging behind technological progress. Take for example Japan’s love for the simple FAX machine, which still plays a significant role in business here, or the fact that most transactions in Japan are carried out in cash. Commercials for VISA debit cards are only now appearing on Japanese TV, a significant part of the financial landscape in other advanced economies for decades.
While bright, young Japanese may be hungry for change, among a rapidly-aging population, their number is dwindling year-by-year. People aged 65 or older currently account for a quarter of all people here, with that figure expected to rise to a third by 2040. One thing that has become abundantly clear to me while living in Japan is that Japanese people (mainly the elderly) are quite resistant to change. One survey respondent also made this point, stating that “cryptocurrency adoption won’t progress at all [as a form of payment in Japan], because of the dominance of cash, particularly in rural areas, which is very difficult to change.” The merits of cryptocurrencies as enablers of commission-free international travel and spending are likely lost on the average Japanese person, who is not globally-minded nor overly keen to venture abroad.
I asked survey participants why they thought cryptocurrencies were popular among ordinary Japanese people. Only 20% said it was because they tend to like new technology, a possible surprise to outside observers. The top two responses were that the Japanese follow trends quickly and that they enjoy speculating. If we include the gambling option within speculation, it takes that figure to around 40%. To be fair, the majority of people around the world who bought crypto during the past year probably feel the same way. Alas, they were not enamored by crypto technology.
Trends play a prominent role among the younger generation of Japanese, and thus fads tend to come and go quickly. Perhaps cryptocurrency will suffer the same fate here – Koji Higashi admitted that consumers pay with bitcoin mostly for its novelty. The prospect of making substantial profits in this ultra-low interest rate economy initially lured in many crypto investors. Now that we are languishing within a bear market, cryptocurrency seems to have fallen out of fashion. Indeed, when asked whether the popularity of cryptocurrency would spread, 67% of survey respondents said no.
Blockchain innovation currently hard to come by
In the paragraphs above, I explained why Japan can’t yet be labeled a hotspot for blockchain adoption; the scale of blockchain innovation here is even smaller. While Japan’s startup scene has traditionally lagged behind that of other countries, it’s gradually beginning to gain some traction. Blockchain startups, however, are considered to be lagging much further behind. Koji Higashi asserts that “all the seemingly ‘new’ and ‘hot’ crypto ventures in Japan nowadays are unoriginal ICO-related services (ICO review, consultation, and the like), and there are virtually no Japanese projects that are unique or potentially disruptive that have a strong presence outside the Japanese market.” This reality may be due to the lack of guidance surrounding ICOs, as mentioned above. According to one observer, “many Japanese ICO projects have needed to seek approval with the FSA on a case by case basis. Some have even structured their ICOs outside of Japan and blocked participation from Japanese residents.”
Fortunately, investors expect new ICO regulation within the next year or two, a confidence-building development which will give a boost to blockchain startups here. Until that happens, however, the number of new players entering the blockchain space, or even toying with blockchain innovation, will likely remain minimal.
I had initially begun my research with the expectation of writing an article about why Japan was considered a leader in cryptocurrency acceptance. Instead, I found myself guilty of taking what I had read in the media at face value and not giving it much critical thought. As I dug a bit deeper, I found that such reporting had been at best exaggerated, and worse just plain wrong. My survey results have helped to confirm this.
My aim was not to attack Japan’s handling of cryptocurrency issues. Indeed, I think they are doing an excellent job; after all, the primary aim of any government should be to ensure the economic prosperity and safety of its citizens. And Japan’s regulations aim to do just that. In addition to clearing up some misconceptions, a key point I want to make is that just because everyone is pushing a particular narrative, it won’t necessarily prove to be true. Instead, it should be carefully questioned and scrutinized. Otherwise, it’s all too easy to get ahead of ourselves when bombarded with sensationalist headlines.
Mainstream blockchain adoption won’t be achieved by the broader public anytime soon. It’s more likely that mainstream adoption will be achieved unconsciously, through the use of innovative services in which the user isn’t even aware they are using blockchain technology. Once that happens, the term “crypto haven” will have lost much of its meaning anyway. So, instead of getting wrapped up in all the hype and misinformation, why don’t we sit back and enjoy the ride.