Japan officially prohibits circulation of cryptocurrencies with high degree of anonymity: the principle of ban, reasons, and effects. How investors can benefit from it
The Japanese Financial Security Agency (FSA) introduces a ban on circulation of cryptocurrencies with a high degree of anonymity starting from the 18th of June after hacking of Coincheck in January. Coincheck (there is yet no information about other exchanges) is delisting Monero, Dash, ZCash и Augur before June 16. Investors will have an opportunity to make profits from short-term short positions, taking advantage from other key factors that put a pressure on the cryptocurrency market. You will learn from the article about the principle of Japan’s restrictions, likely future effects, and a personal opinion about its consequences.
Japan changes cryptocurrency policy: what is the reason and how to benefit from it
Just recently, it has become known that the turnover of anonymous cryptocurrencies will be completely banned officially starting from June 18. It can’t be said to be unexpected but investors preferred hoping for better. This key event, in fact, means two things. First, a country that once was thought to be the biggest supporter of blockchain backed initiatives abruptly changes its stance at the official level. It’s not a good sign for cryptocurrencies.
Second, confidentiality is one of the cryptocurrency basic principles. It was already shaken by the USA authorities in late 2017, when the Federal Court ordered to hand over personal details of owners of about 20,000 wallets. And now Japan delivers the second blow. The ban on anonymous cryptocurrencies suggests the first step towards the official regulation of cryptocurrency turnover. Investors will certainly take it negatively, but it can yield some profit.
Restrictions by Japan’s regulator: principle, reasons and effects
Just two or three years ago about 70-80 % of the total cryptocurrency turnover was in China. However, the capitalization of coins was so little that the country’s regulators didn’t pay much attention to the cryptocurrency market. When the market started booming in spring, 2017, China’s authorities understood how uncontrolled circulation of anonymous coins can affect the national economy. Japan and South Korea became the leaders in the industry due to the Introduction of these strict limitations. Moreover, Japan advanced the most and became the first country to recognize Bitcoin as fiat money. Such determined action meant recognition of cryptocurrency by global leading countries. It was also proved by launching futures trading on CME and CBOE.
The first thunder struck in summer, 2017, when the servers of one of the biggest at that time exchanges BTC-E were suddenly arrested, as there Bitcoins, missing from Mt.Gox, were tracked. Already then, the representatives of many countries expressed concerns about the possibilities of money laundering by means of cryptocurrencies. According to them, the coins could be used:
- to fund terrorism (cryptocurrency would be used to transfer fiat money from one country to another);
- to spread the information that would violate the norms of ethics and morality (it is about smart contracts of decentralized networks);
- for payments in illegal business (for example, Monero is thought to be the currency in on-line casinos and gambling business).
In theory, any cryptocurrency should be anonymous (that any information about the wallet owner is not available to both transaction participants and other people). To paraphrase a well know expression from a movie: “All cryptocurrencies are private, but some of them are more private than others”.
Anonymous coins include Monero (XRM), Dash (DASH), ZCash (ZEC), their forks and followers. Without going into details of ring signatures and types of encryption, I’ll say that anonymous cryptocurrencies don’t allow tracking transactions, their history and owners. Which Bitcoins and other payment systems lack. For example, WebMoney payment network can also be called confidential, but when a person registers they indicate their real information. Payments seem to be anonymous, but other people can get the access to the account. Or the users themselves can by chance reveal their data or IP, when paying for a good, for example.
Anonymous cryptocurrencies encrypt the code so much that it is impossible to find out who is behind a nickname. In the screenshot below, it is shown how a wallet was hacked and a large amount of money was withdrawn. But it’s clear, who withdrew the money. And the personal data can be obtained. Anonymous cryptocurrencies rule out that possibility, completely hiding both the sender and the recipient.
Although there is no 100% confidential cryptocurrency, Monero features one of the best encryption algorithms. And that is its biggest flaw.
Coincheck was hacked in January, 2018. The stolen amount became the all-time record, $ 533 million. The hackers were not found; and it became the last straw that broke the back of FSA (Japan’s regulator).
To prevent a repeat of the case with Coincheck, FSA in May-June introduces the following rules of the market regulation:
- Exchanges mustn’t keep cryptocurrency on on-line wallets (wallets connected to the Internet).
- Clients must be identified and verified for large transfers. It is yet unknown what the exact amount is and how the verification will be handled.
- Customers’ accounts must be monitored many times a day for unusual activities. The regulator orders to introduce the rules that will make it impossible for exchange staff to use customers’ money.
- Operators (exchanges) must clearly distinguish the role in asset management between shareholders and management. In theory, it should eliminate any possibilities of the system manipulation by the management for personal purposes. However, I doubt that it will be efficient.
- The turnover of certain tokens with high degree of anonymity that can be used for money laundering must be limited.
It is the final point that is especially interesting, for it directly affects the capitalization of tokens and the whole market.
Effects of the regulator’s decision
It is hard to say why Japan has so abruptly changed its stance. As the country’s cryptocurrency exchanges were working with the fiat money as well. And now, after the issuing of new rules, this turnover will just move to other countries, like it happened to China. It is also unclear what the situation is with other confidential cryptocurrencies, which include dozens of coins, and what will be with ICO. There is no exact definition of what cryptocurrency is anonymous, and there are many types of protocols. And the money can be well laundered by means of even Bitcoin, which was proved by the case with BTC-E exchange.
This list includes major cryptocurrency exchanges in Japan. It shows that Coincheck is the only large one. The exchange has confirmed it would be delisting Monero, Dash and Zcash before June 16, warning the holders to convert the coins into other altcoins or transfer them to other wallets.
Anyway, the biggest percentage of circulation of privacy-based cryptocurrencies is still on the South Korean and European exchanges
It is remarkable that, following anonymous cryptocurrencies, Coincheck is delisting Augur (REP) that is a prediction market platform (virtual prediction service, like betting shops). This project’s advantage might be that it could be used as the tool for prediction based on the majority opinion, like mathematical and statistical analysis. But in Japan, it was compared to gambling.
There haven’t yet been any sharp rate changes of Monero, Dash и Zcash, though the first two coins left TOP-10. For example, Monero’s trend is wave-like, but rather pessimistic, directed downwards.
Dash also has a similar wave-like chart. These both coins are close in rating and are moving almost in the same way. The only difference is that Monero’s swings are narrower.
The main danger of Japan’s decision is that, South Korea can follow China and Japan; its exchanges have been also hacked many times. The country’s exchanges are the TOP-20 leaders by the trade turnover. Considering the fact that there is a global trend of stricter limitations of cryptocurrencies, it would be risky to bet on their bright future.
Not only will the ban on anonymous cryptocurrencies press the total market capitalization down. There a few more reasons to expect the quotes’ drop or at least trading flat during the next month in the range of $300-400:
1. MT.Gox trustee Nobuaki Kobayashi (also a Japanese, by the way) continues selling free BTC. May 10, another 8200 BTC amounting to about $70 million was sold. The trustee himself denies his influence on the general market state. It means that he is not going to stop. Remember, he was holding about 200,000 of BTC and BCH, less than a half of which has been liquidated.
2. SEC is still waiting, but it is clearly unwilling to support cryptocurrencies. The Commission hasn’t yet made any official statements. But if they appear, the cryptocurrency market will immediately respond with a drop, as the Commission won’t say anything positive for digital money.
Conclusion: Despite the loud statements by some eminent personalities of the cryptocurrency market that the market cap can increase up to $4 trillion and more (Dan Morehead, a founder and CEO of Pantera Capital hedge fund), we can say, it is going to stagnate in the near future. Anonymous cryptocurrencies have been already removed from TOP-10 market cap rating, and they are likely to draw down deeper in June.
How to make profits from it:
- Chose trading tool “Cryptocurrencies” in your LiteForex client profile Follow the anonymous cryptocurrencies and open short positions for ZCash, Monero, Dash during the first local drawdown of the whole market before June 18. By the way, you may open it for Monero and Dash already now. ZCash has a straighter chart, though moving down since mid-May. Don’t forget to include swap, as if the price is falling slowly, you’d better not go short.
- Wait until the quotes go down after the ban. With the first reversal that can start a few days later close positions. As the news from Japan is rather being local, the market will soon take it out. But, there is no smoke without fire: if South Korea follows Japan, the market will face hard times.
You can also bet on BTC drop, but during stagnation, its rate goes down slower than that of other cryptocurrencies.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.