Terrie's Take 932 -- Is the Cryptocurrency Challenge Too Hard for Japan's FSA? e-biz news from Japan.

Mon Feb 19 15:34:52 JST 2018

* * * * * * * * TERRIE'S TAKE - BY TERRIE LLOYD * * * * * *
A weekly roundup of news & information from Terrie Lloyd, a long-term 
technology and media entrepreneur living in Japan.
(http://www.terrielloyd.com)

General Edition Sunday, Feb 18, 2018, Issue No. 932

- What's New -- Is the Cryptocurrency Challenge Too Hard for Japan's FSA?
- News -- Corruption Charge Against Olympic Bid Company
- Upcoming Events
- Corrections/Feedback
- Travel Picks -- Top 3 Things to Do in Tsuruoka, Guide to Sake in Niigata
- News Credits

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+++ WHAT'S NEW

Over the last couple of weeks, it has been interesting to watch the 
Japanese Financial Services Agency (FSA) and others swing into action 
over the massive hack of Coincheck, and yet surprisingly there hasn't 
been a hint of discussion about banning cryptocurrencies as being too 
risky. Normally in a new sector as wild and western as NEM and Bitcoin, 
especially after a half billion dollar heist, there would be a 
significant negative reaction by the Japanese financial authorities - 
typically in the direction of shutting down the sector or at very least 
the company. But instead, we are seeing the authorities doubling down, 
continuing with their certification of the remaining 16 cryptocurrency 
exchanges (16 are already certified) and encouraging trust banks to 
promote the idea that they can take a custodial role in handling these 
new assets.

Our guess, and this is pure speculation on our part, is that several 
years ago the Prime Minister's Office and the Ministry of Finance 
jointly decided that in order reverse the hemorrhaging of foreign 
financial firms from Tokyo to Hong Kong and Singapore, they had to 
promote a slice of the financial sector that isn't driven by traditional 
banking mores. In particular, a slice that isn't driven by high-paid 
foreign bosses who want to locate their financial operations in low-tax 
jurisdictions but where they can still enjoy the high life.

When you look at the personnel and property overheads of those 
traditional financial firms, Japan is at a severe disadvantage because 
its large indigenous population needs the higher tax rates to maintain 
minimum public services. In contrast when you look at the needs of 
purely web-based financial firms, like those in the cryptocurrency game, 
then the HR/property cost silos are insignificant and the higher tax 
rates are offset by the benefits of a sound digital infrastructure and 
exposure to a large local investor market. Then of course there is 
"nearby market" for which, unlike Singapore and Hong Kong, Japan is 
large enough and diversified enough not to be bullied by anti-crypto 
forces in China and S. Korea.

Just how much pain the Japanese authorities will put up with in order to 
realize their vision of building a high-tech financial sector in the 
crypto space is hard to say. They must already be really unhappy with 
the fact that Coincheck is the second major hack to have hit a Japanese 
cryptocurrency exchange in the last four years, the first being Mt. Gox 
in 2014. What is notably different this time around is how they are 
treating the management of the errant company. No jail time and no 
accusations of internal fraud, even though internal fraud is entirely 
possible in Coincheck's case as it was in Mt. Gox's.

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[...Article continues]

Actually, let us re-phrase that. We find it difficult to believe that 
Coincheck has been allowed to stay in business, and find the whole thing 
a bit fishy. Is there is something going on behind the scenes that the 
public is not privy to? For example, how is it possible for Coincheck to 
offer compensation for the victims of the hack, all 260,000 of them, 
when they only have about JPY200m in capital (assuming the numbers on 
their corporate website)? You have to wonder where they are getting the 
money for this. Is there a supply of funds (like the industry guarantee 
pool that the travel sector has) from the government that isn't being 
publicized?

As a side note on the Mt. Gox bankruptcy, the government-appointed 
receiver is currently holding the remaining assets of the company, which 
is mostly comprised of a cold wallet containing 202,000 Bitcoins. Back 
in 2014 the coins were worth about US$500 each, but as of yesterday were 
worth US$10,580 each - a factor of 20x appreciation. What will burn the 
original investors is that they only get back the value of their assets 
when the company went into liquidation, i.e., the US$500 per coin. The 
remaining US$1.8bn (approx.) of Bitcoin value is supposed to be returned 
to the Mt. Gox holding company shareholders - namely, 88% to founder 
Mark Karpeles. We're willing to bet that this sum is juicy enough that 
the government will take a shot at issuing a large fine to cover "costs" 
before anything is paid to Karpeles..

Also interesting is a recently filed lawsuit in the USA claiming both 
Karpeles and Mizuho co-defendants. Black eye for Mizuho here.

http://bit.ly/2EBhksi [Lawsuit against Karpeles-Mizuho]

The cause of the Coincheck theft appears to be sloppy security 
management, where substantial amounts of funds held by the firm's many 
investors were being kept in hot wallets connected to the Internet. This 
was a surprising practice because as an exchange, of all players, they 
should know better than to leave customer assets unnecessarily exposed 
to the internet, where hackers lurk. If there is one thing that 
cryptocurrency firms around the world are learning quickly it is that 
despite having the best security engineers available, there is always 
going to be someone out there who has the time, motivation and 
creativity to come up with an exploit that is unimagined and 
unanticipated until it is perpetuated. In other words, you don't put all 
your eggs in an exposed basket where they can be hacked all at once.

This raises another issue, which is whether the Japanese software 
security industry is sophisticated enough to reliably offer 
cryptocurrency services in the first place. Online exchanges are natural 
magnets for hackers because the assets they handle have anonymous 
owners, allowing anyone smart enough to steal those assets to stay 
unknown to the authorities after the theft. This is a huge temptation 
for all and sundry. Then of course, there are the many state-sponsored 
hackers who are actively encouraged and rewarded by their governments 
for attacking "those nasty Japanese". Indeed, the latest speculation is 
that the entity hacking Coincheck was North Korea.

The FSA appears to be presenting the public the story that it is in 
charge and with its oversight, know how, and experience, everything will 
be OK. We don't think so. Particularly risible is the announcement that 
the FSA will expand its onsite inspections to all of the virtual 
currency exchanges that are either already licensed or are expected to 
be soon. It says that it will check each exchange's risk management 
system (systems infrastructure and separation of cash and crypto 
assets). Oh, really? Do the FSA folks understand that the biggest risk 
is that they are in a business where the risks are not fully discovered 
yet and another massive theft is only as far away as the next smart 
hacker's exploit? And what about those platforms that don't use a 
centralized exchange (but which are more secure than a centralized 
exchange)? How will the FSA regulate those?

That the FSA thinks it can ride this tiger by the tail shows, in our 
opinion, how unprepared it really is. Still, if the FSA does set up a 
compensation fund while exploits continue to be discovered and 
eliminated, that would be a good thing for consumers and it would 
certainly attract a lot of investment attention from overseas.

In the longer term, though, we think the FSA should convince the Prime 
Minister's office to sponsor a new generation of white hats working 
either for the government directly or for a suitably endowed local 
technology institution (preferably one with strong international 
scholarly and technology links) so that as the field evolves, the 
country can keep up with the exploits and deal with them. Better still, 
the new engineers may come up with a better way to ID and/or contain the 
players behind the transactions, and thus intercept them after a crime 
has been committed - all without necessarily compromising the anonymity 
features that make cryptocurrencies so popular.

This shouldn't be impossible, and parallel mechanisms already exist for 
traditional securities. Take, for example, Bearer shares issued by the 
British Virgin Islands and similar jurisdictions. In these locations, 
anonymity is protected right up until a crime is proven in court, and 
thereafter the court can force the release of information on who holds 
those shares - upon pain of seizure of the company and/or its assets by 
the government if the order is not complied with. Crypto could work in a 
similar vein, with criminally obtained assets being tagged as being 
illegal, non-tradable, and seizable (one supposes the government would 
hold a master key that allows them to overwrite ownership of assets, 
even though they don't know who owns them). The NEM oversighting 
organization in Singapore has already tagged the stolen Coincheck coins 
to inhibit downstream transactions with them.

Japan has been a leader in the financial sector in the past, when it 
invented the Zengin Net banking system back in the 1970's, and touchless 
payment card system (such as Sony's Felica) in the 1990s, so they are 
capable of moving fast and thinking far ahead when they want to. 
However, the difference between then and now is that this time around 
there are no devices involved and thus Japan's core manufacturing 
expertise is not relevant. Instead, the new currency systems are 100% 
software and they are shared/decentralized. Thus, Japan needs to 
redouble its efforts to train a generation of software engineers who can 
think quickly and creatively, and realize that regulation alone will not 
be enough.

...The information janitors/

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-----------------------------------------------------------

+++ NEWS

- Yen is undervalued by 20%
- Optional Pensions Will Start at 71
- 62% of bank loans carry 1% or lower interest rate
- Corruption Charge Against Olympic Bid Company
- Yet another bikesharing company

=> Yen is undervalued by 20%

The currency strategists at Societe Generale have said that the yen is 
effectively undervalued by about 20% (they were referring to the yen's 
real exchange rate versus its long-term average). They also said that 
the national trade-weighted index is about 3% below its multi-year 
average - meaning that the yen is likely to strengthen in the long-term 
on current fundamentals. The yen rose to JPY106.84 to the Dollar on 
Friday, and has now risen about 5% since January 1st. (Source: TT 
commentary from bloomberg.com, Feb 14, 2018)

https://bloom.bg/2CugyY7

=> Optional Pensions Will Start at 71

While the retirement age is gradually moving up from the current 62 
years old to 65 (it's being raised in stages), a little known pension 
option is setting a new high bar in terms of age to collect your 
pension. The labor ministry has just approved a plan to raise the upper 
age a person can optionally start to collect their retirement allowance, 
to 71. Currently the law sets the upper age as 70, with those opting to 
start at 65 or higher getting a higher monthly payout than those 
starting at 60 - due to the fact that payouts are based on a percentage 
of lifetime pension contributions. ***Ed: Although the government is 
saying it won't uniformly push up the retirement age from 65, we're 
willing to bet that this is just a trial balloon and that Japan will 
shortly follow the UK in boosting the standard retirement age.** 
(Source: TT commentary from japantimes.co.jp, Feb 16, 2018)

http://bit.ly/2Hrj5pR

=> 62% of bank loans carry 1% or lower interest rate

Japan is certainly the place to be if you want a bank loan. According to 
the Nikkei newspaper, of the roughly JPY471trn in loans made by banks in 
2017, a full 62% of them earned the bank an interest rate of less than 
1% annually. In fact, only 10% of loans - mostly to consumers and small 
businesses - had interest rates of more than 2%. ***Ed: The whole 
lending situation is a downward spiral. The companies that actual need 
loans, Small- to Medium-sized Businesses (SMBs) are unable to get them 
without making onerous personal guarantees which could potentially ruin 
the company founders. And because the banks are not making profits 
lending, they are becoming even more risk averse. To break this cycle 
and increase lending to those who actually need it, the government 
should reverse it's downgrade 5 years ago of loans protection for SMBs 
(the government currently covers 80% of loan liabilities, the bank owns 
the other 20%) and also set specific lending targets to this type of 
customer.** (Source: TT commentary from nikkei.com, Feb 16, 2018)

http://s.nikkei.com/2BFBXAK

=> Corruption Charge Against Olympic Bid Company

The shady Singaporean company that the Tokyo government allegedly paid 
two million dollars in consulting fees to, has just had its CEO Tan Tong 
Han found guilty of corruption. His company, Black Tidings, is suspected 
to have paid US$1.4m bribes on behalf of Japan to influential sports 
figures in various African nations to swing the selection of Tokyo as 
the host city for the 2020 Olympics - although the charge last week was 
over Tan lying about related funds payments, to the Corrupt Practices 
Investigation Bureau. Tan is believed to have channeled the Tokyo 
payments to Papa Diack, the son of the former IAAF President, Lamine 
Diack. ***Ed: Meanwhile the French police continue their investigation 
as to whether Tokyo was involved in the bribes. This could all get 
rather embarrassing, even if the Japanese are only accused of 
naivete..** (Source: TT commentary from insidethegames.biz, Feb 15, 2018)

http://bit.ly/2ofacXy

=> Yet another bikesharing company

On February 14, yet another bikesharing company entered the busy 
Japanese market, launching a new service that will start from Fukuoka. 
The new player is flea market operator and Internet "unicorn" Mercari, 
and the new service is called Merchari. The company will start out with 
400 basic bikes provided from 50 ports around the city, although it 
plans to spread across the country. The service will be ultra-cheap, 
starting out at just JPY4/minute. ***Ed: While Mobike, OFO, and Softbank 
are also competing in this space, it remains to be seen whether these 
new services will be all that popular, as they will have to compete with 
DoCoMo, which has already tied up with a number of cities around the 
country. Being tied to a city means bike portals can be located on city 
sidewalks, and not just on the private grounds of a commercial partner. 
Indeed, the shortage of bike parking space and also the likelihood that 
cities will start complaining as the bikes are being left in random 
places by Chinese tourists, is likely to present a major hurdle to new 
Japanese players. On the other hand, of course, these low-end bikes are 
just 25% of the cost of a DoCoMo electric chariot, and so thrifty local 
users may also find that compelling.** (Source: Mercari.com press 
release, Feb 13, 2018)

http://bit.ly/2EBhX58

NOTE: Broken links
Some online news sources remove their articles after just a few days of 
posting them, thus breaking our links -- we apologize for the inconvenience.

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+++ UPCOMING EVENTS

--------- UK/Germany Japan Travel Seminars --------------

Title: "Latests Trends in Japan's Inbound Travel Boom"
A series of free travel seminars in the UK and Germany, by Terrie Lloyd

Japan is in the midst of the world's largest inbound travel boom in the 
last 20 years. From 2011 until 2017, the number of inbound travelers has 
increased 450%, from 6.2m to 28m (estimated) by March 31st this year. 
What is exciting about this US$40bn+ travel boom is that more than 50% 
of the market is held by non-Japanese firms, and that means great 
opportunities for UK and German firms as the growth continues.

As founder and CEO of one of Japan's top inbound travel sites, 
www.japantravel.com, Terrie Lloyd is at the forefront of the market, 
helping to make and shape trends as the market evolves. His particular 
focus is on repeat travelers, who now account for more than 55% of the 
flow, and who are demanding more specialist experiences that typically 
define a maturing market. His presentation will share the latest news on 
what trends are emerging, and where the opportunities lie for UK and 
European firms.

Terrie will give some specific examples of new travel products and 
services now under development, particularly highlighting hiking and 
trekking trails in Kyushu, a still-underdeveloped part of Japan (read, 
low cost, great food, and no hordes of tourists)

Speaking Locations
Seminar 1: London, UK, Monday March 5th in the London CBD (Location to 
be advised)
Seminar 2 & 3: Berlin, Germany, Thursday March 8th at a location close 
to the ITB expo (Location to be advised)

The seminars are free of charge. Other details will be confirmed as they 
come to hand. Interested attendees can reserve a space, by emailing us 
at jerome.lee at japantravel.com.
-----------------------------------------------------------

+++ CORRECTIONS/FEEDBACK

No events or corrections this week.

***------------------------****-------------------------***

+++ TRAVEL DESTINATIONS PICKS

=> Top 3 Things to Do in Tsuruoka City, Yamagata

Designated a UNESCO Creative City of Gastronomy in 2014, Tsuruoka is 
blessed with abundant nature thanks to its location on the Shônai plain 
in Yamagata Prefecture. The top three things to do in Tsuruoka area are, 
in our opinion, the following.

1. Dewa Sanzan
The three sacred mountains of Dewa Sanzan let hikers follow the old 
pilgrimage route that links Mt. Haguro, Mt. Gassan and Mt. Yudono. 
Considered highly significant to Shintô, Buddhism and Shugendô (a 
syncretic form of Buddhism and Shinto) pilgrims can worship the mountain 
deities that exist in all things in nature. Dewa Sanzan originally 
opened as a religious center in 593 by Prince Hachiko, the son of the 
Emperor Sushun. The Sanjin Gôsaiden shrine, the largest structure in 
Japan with a thatched roof, opened in 1818.

2. Kamo Aquarium
Rebranded and relaunched in 2014, Tsuruoka's once struggling Kamo 
Aquarium is now a state-of-the-art attraction, renowned for displaying 
the largest jellyfish collection in the world. It has no less than 50 
different species of jellyfish, according to the Guinness World Record. 
The aquarium has a 5 sq. m. tank called the "Jellyfish Dream Theater", 
which features 50 species in the same space. Oh, and you should try the 
jellyfish ice cream!

3. Zenpoji
Surrounded by the Dewa Sanzan mountains, Zenpoji is a Buddhist temple 
founded in the Heian period. Visitors can view prayers throughout the 
day and take part in Zazen meditation.  One of the temple's many 
impressive buildings registered as Tangible Cultural Properties, is the 
impressive 5-storey Sanmon pagoda, which was rebuilt in the 1860s.

http://bit.ly/2oj7d0b

=> A Guide to Sake in Niigata City

Niigata Prefecture is home to some 90 sake breweries and is famous for 
producing some of the country's top quality sake. In Niigata City, there 
are many ways to experience sake from large-scale events, brewery 
visits, to gourmet dining.

* Sake tasting event
Niigata's Sake no Jin Festival is an annual two-day event held on the 
second weekend of March. It was created in 2004 to introduce people from 
outside of Niigata to sake, while also introducing Niigata's local food 
and culture. People can enjoy over 500 brands of sake from over 90 
brewers. There are also cultural performances and seminars. Be warned 
that it can get crowded - with about 120,000 visitors last year.

* Visiting a brewery
Since 1767 the Imayotsukasa Sake Brewery has been brewing sake using 
traditional methods - in particular, without artificial ingredients. The 
brewery is open year-round to the public and offers free tours to take 
you through the brewing process and its history, concluding with a sake 
tasting session. It is possible to do the tour in English if you request 
it in advance.

http://bit.ly/2o9Dyr6

***------------------------****-------------------------***

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END

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+++ ABOUT US

STAFF
Written by: Terrie Lloyd (terrie.lloyd at japaninc.com)

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