Will Japan's bid to regulate bitcoin be good or bad?

By Tomoyuki Tachikawa, Kyodo

Posted at Mar 09 2014 09:11 AM | Updated as of Mar 10 2014 05:36 PM

TOKYO - Japan's move to regulate bitcoin -- a digital currency used as a means of payment among Internet users worldwide -- has sparked widespread debate on the pros and cons of public intervention in the new private-oriented market.

Following last week's abrupt bankruptcy of major Tokyo-based bitcoin exchange Mt. Gox, lawmakers have started to call for a legal framework to protect users and supervise the virtual currency, which they say is sometimes used for crimes.

Some analysts, however, warn that cracking down on bitcoin prematurely would hamper innovation in providing a more convenient payment system for individuals and companies across the globe.

Regulation of the bitcoin market could preclude new competitors and limit the potential of digital currencies to work as a supplement to traditional payment systems, they say.

On Wednesday, a panel of Prime Minister Shinzo Abe's ruling Liberal Democratic Party agreed to advance discussion to introduce regulation of bitcoin, and the New Komeito party, the LDP's coalition partner, followed suit the next day.

"Personally speaking, bitcoin may significantly affect the existing financial order. In the worst case scenario, it could melt down the world's currency system," New Komeito lower house member Yuzuru Takeuchi told reporters Thursday.

Bitcoin "should be under some public control" as "fears are growing that (the virtual currency) has been used for crimes like drug dealing and money laundering," he added.

Japan currently has no laws regulating bitcoin.

Abe's Cabinet on Friday adopted a formal position on bitcoin trading, deeming it as a non-currency market product that is not handled by banks and security houses and clarifying that profits from its transactions would be taxable.

"We are making efforts to collect information, and we will take action if necessary," Economy, Trade and Industry Minister Toshimitsu Motegi said at a press conference.

Bitcoin has gained attention among global investors and firms since it began trading around 2009 due in part to its ease of use in cross-border exchanges and anonymity, experts say.

With the popularity of the digital currency growing, investment money has been flooding into its market, driving up bitcoin prices by about 100 times during the last year against major currencies including the U.S. dollar and the yen, the experts said.

Mt. Gox, once the world's leading exchange for the virtual currency, filed last Friday for civil rehabilitation proceedings with the Tokyo District Court after suddenly shutting down all transactions earlier in the week.

The exchange, which is believed to have had up to a million users, said it was illegally accessed in early February and consequently lost about 11.4 billion yen worth of bitcoins, converted at the rate on Feb. 25.

Amid worries over the bitcoin market, many countries have been trying to strengthen surveillance of it.

In the United States, Sen. Joe Manchin, a member of the Senate Banking Committee, sent a letter to federal regulators seeking a ban on the digital currency, while China has prohibited financial institutions from handling bitcoin.

Japanese Senior Vice Finance Minister Jiro Aichi said at a news conference last week, "International collaboration will be necessary" to guard against loopholes in laws on the virtual currency from imposing losses on its users.

But concern is mounting over the government's attempt to regulate bitcoin.

Hiroshi Mikitani, the president of online shopping mall operator Rakuten Inc. in Japan, said Wednesday that Abe's administration "should decide whether to regulate (bitcoin) after in-depth discussion," urging it not to act in "a hasty manner."

Mikitani, a member of a government panel responsible for drawing up the country's policy to bolster economic growth, is apparently wary that public regulation may hurt technological progress led by the private sector.

Yasushi Hoshi, an analyst at the Daiwa Institute of Research, echoed the view, saying the bitcoin system "has offered an excellent means of payment at low cost, which can satisfy the needs of its users."

"It is not too much to say that (bitcoin) is an innovation in the financial arena," Hoshi said, adding, "Inhibition of innovation would not benefit people."

Hitoshi Ebiko, a professor of public policy at Hokkaido University, expressed concern that a strong government grip on bitcoin would impede "evolution of new currencies" exempt from arbitrary state control.

If rivals of bitcoin emerge, they would competitively improve the quality of digital currencies developed by free individuals and organizations. This would help offset the demerits of the existing system, such as high transaction costs and currency depreciations by monetary easing or worsening public finances, Ebiko said.

"I hope that the future potential (of virtual currencies) will not be eliminated" by government regulation of bitcoin, he added.