The risks of cryptocurrencies and blockchain technology

 ■ The risks of cryptocurrencies and blockchain technology

The Digital Risk Association, of which I act as Chair, held the 2018 Cryptocurrency and Blockchain Forum. Discussions centered on extremely dry topics, such as the risks surrounding cryptocurrencies, blockchain technology and initial coin offerings (ICO). Nevertheless, the venue was instantly packed with 700 attendees, despite the fact we had not actively publicized the event. This illustrates the level of interest in this field. 

Let’s turn to cryptocurrencies first. Bitcoin has grown strongly, with ¥10 trillion traded in 2017. A regulatory system is now in place with the passing of the revised Financial Settlements Act. The closure of Mt. Gox spurred on discussion both of cryptocurrencies and exchanges that trade in them. This led to the establishment of a legal framework and a system for registering cryptocurrency exchanges. 

Japan is the only country to have such a system. Media coverage of the establishment of this legal framework led to much public interest and an increase in the number of accounts opened to trade in cryptocurrencies. This caused a concomitant rise in risks surrounding price volatility and fraud. The Financial Services Agency set up a monitoring team of 30 specialists in the field.

There is also a risk of losses at exchanges. With an increase in wallet applications, there is a tendency for people to have a sense of security once the money is inside their app. However, just as there is a big difference in putting one’s money into a bank (exchange) or putting it under one’s mattress, there is a debate about the security benefits and drawbacks of this method.

Japan is currently having a debate on initial coin offerings (ICO). These are initial public offerings of cryptocurrency (tokens) when establishing a business. This massive and rapid influx of high-risk investments has received much attention, reaching ¥450 billion globally.

However, the position of ICOs is still unclear in Japan and is up for debate. Rights are unclear and there is a high risk that investments will become worthless. It has also been pointed out that it entails risks around money laundering and fraud. Nevertheless, the number of ICOs has been increasing and more of them are good opportunities. Everyone agrees that continuing in this positive direction will require the establishment of clear rules and agreement on best practice.

There is much hope and scope for growth, but many issues remain. There are many things that businesspeople, lenders and borrowers need to be careful of. The Government is putting in effort and public-private collaboration will be vital. I was able to share this reality by participating in the debate.