BITCOIN BREAKS THE $2,000 BARRRIER: JAPAN AND KOREA’S RECOGNITION OF BITCOIN AS LEGAL TENDER HERALDS A NEW SUNRISE FOR CRYPTOCURRENCIES IN ASIA
From lukewarm mainstream interest and negative perceptions about cryptocurrencies, 2017 signals a new sunrise for Bitcoin in Japan and South Korea.
2017 has been a good year for Bitcoin so far. The number of countries that accept bitcoins as legal tender continues to grow, leading to growing institutional and business acceptance of the currency for payment transactions and as an asset class. While European governments took the lead in 2016, 2017 has been Asia’s turn, with Japan and South Korea dominating headlines in May for driving record trading volumes on cryptocurrency exchanges.
In the month of May alone, bitcoin has posted several records including reaching a lifetime high and a barrier breaking $2,000 in price, more than doubling in value since the start of 2017. The price rise has been led by a demand frenzy in Japan and South Korea, where bitcoin currently trades at nearly 30% premium over other countries.
This article has an in-depth view of developments affecting Bitcoin in Japan and South Korea between April and May 2017.
Positive Developments in Regulatory Climate
2017 has signalled favourable winds of regulatory change blowing across digitally savvy nations of Japan and South Korea.
Japan’s Virtual Currency Act comes into force from April 1, 2017 giving recognition to cryptocurrencies as legal tender for payment transactions and as assets.
In March 2017, the Japanese government signed into law, amendments to the Bank Act, to induct proposals from the Japanese Financial Services Authority (FSA) to allow bitcoin and other digital cryptocurrencies to be used for payment transactions and as an asset for trading and exchange. The complete framework of amendments also referred to as the Virtual Currency Act, covering regulatory requirements for market participants, fintech companies and consumers is expected to take shape and go into implementation over the rest of 2017. Another highlight for consumers and businesses is that virtual currency payments be excluded from consumption tax from July 1, as per a newly added provision in Japan’s 2017 tax reform amendment.
Both events have had a cascading effect on mainstream acceptance and price of virtual currencies led by bitcoin in Japan. Since April, at least 10 new exchanges have been launched, which include a new trading platform by Japanese Internet conglomerate GMO.
Japan’s largest financial institutions such as megabanks Mitsubishi UFJ, Mizuho and SMBC and insurance companies have already invested in fintech companies, since the start of 2017, in anticipation of the Virtual Currency Act coming into force.
South Korea moves towards regulation of bitcoin and the development of a national digital currency
South Korea, where bitcoin is trading at a 30% premium of $2,850, at the time of writing, over Europe and USA, is also expected to make major strides in bitcoin regulation in 2017. Earlier this month, Pulse News, a Korean news site, reported that the South Korean government is moving to lower equity capital requirements for fintech companies that offer bitcoin mediated remittances, with effect from July this year. A report released by South Korea’s central bank in April, further recommends that virtual and fiat currencies can co-exist. These developments come against the backdrop of announcements made by the South Korean government in late 2016, on creating a systemic groundwork by investing over 3 trillion won or USD 2.65 billion over three years, towards the fintech sector including development of a national digital currency on a blockchain.
Japan and South’s Korea market driving bitcoin price rise
Japan and South Korea have a dominant share of bitcoin exchange trading volumes, occupying third and fourth positions respectively among all currencies and accounting for nearly 50% of the market share. With April’s developments, mainstream adoption, clear signals of a favourable regime for virtual currencies have only spurred demand. Since May, bitcoin is being traded at a premium in both countries. The growth is further aided by the fact that exchanges in Japan are now the only marketplaces that offer transactions without fees.
The demand in both countries is also driven by arbitrage opportunities available with virtual currencies, further influenced by strict AML regulations. Charles Hayter, the CEO of CryptoCompare which reported a 48% combined volume between the Japanese yen and Korean won in May explained this in an email to CNBC. “Arbitrage between the fiat pairs drags markets up or down in line with leading markets. At present, volumes on the KRW and JPY pairs dominate trading with a combined 48 percent market share.”
Market demand at the time of writing (in the last week of May), shows no signs of abating and if the trend continues, it will not be surprising if the price of bitcoin breaks the $3,000 barrier by June. However experts are cautioning that the rapid growth has indications of a speculator bubble driven by first time investors in Japan flocking to the market.
Mainstream adoption accelerates in Japan
Legal recognition of virtual currencies has escalated both demand and acceptance of bitcoins and other cryptocurrencies in payment transactions. bitFlyer, Japan’s largest exchange, aired “the first TV commercial by a bitcoin and blockchain company” on Japanese national television in May 2017, which includes a 5,000-yen rewards campaign for 30 new account holders. bitFlyer has announced partnerships with multiple retail and consumer businesses such as Dell, Bic Camera, a retail consumer electronics chain and five major LP gas distributors.
Other businesses such as Peach Aviation, a Japanese discount carrier and Recruit Lifestyle, the retail arm of Recruit Holdings have also announced partnerships and initiatives to start accepting cryptocurrency payments from this year. According to according to Midori Kanemitsu, chief financial officer bitFlyer, “The number of stores accepting it “is expected to rise to 300,000 or so in 2017” as reported recently by Nekkei Asian Review.
Australasia to follow suit?
Australian Government recognizes bitcoin as money and removes double taxation
On the heels of Japan and South Korea and the success of Bitcoin, governments over the world are now competing to promote fintech innovation and spur economic activity and investment through the development and adoption of virtual currencies.
In May 2017, the Australian government released budget provisions like Japan, geared at creating a favourable environment for fintech innovation and virtual currencies. This includes legal recognition of bitcoin as money by Jul 1, 2017 and exemption from goods and services tax (GST). There is further incentive for trading wherein investors will be exempt from tax on regulated exchanges, eliminating the double taxation barrier.
Australia, had seen a drop in trading owing to double taxation of cryptocurrency transactions at exchanges and banks, while also simultaneously witnessing an exponential consumer adoption, factors that may have contributed to a shift in the government’s stance.
Living Room of Satoshi, an Australian cryptocurrency payments processor has reported an exponential rise in bill payments using bitcoins with a 5 million AUD daily volume recorded in May 2017.
The ambiguity, if not outright rejection surrounding the use of cryptocurrencies as legal tender, is being replaced with a race for acceptance, as countries all over the world understand the benefits of digital currencies and blockchain technologies.
Governmental sanction for bitcoin has always raised questions from cryptocurrency evangelists who argue that it clashes with the decentralization philosophy of peer to peer transactions. For consumers and businesses, legal status removes uncertainty and assures protection that is associated with all asset classes. For new fintech start-ups, the regulatory requirements create a barrier to entry and potentially stifle innovation as legacy financial frameworks and big banks enter the fray. The biggest gainers have been the early investors and adopters of Bitcoin as well as other cryptocurrencies, all of whom are clearly benefiting from the increased demand.
In the end, like other aspects on the role of governments in the life of citizens and institutions, it is a fine distinction between oversight versus control.