When Binance Japan began trading on Aug. 1, it immediately offered 34 coins. That’s less than 10% of the total number of different cryptocurrencies listed on Binance’s global exchange, the world’s largest. But for Japan, the number is significant. It puts the new Binance Japan platform at the top of the national pile in terms of variety for crypto traders.
While that’s good news for the Japanese consumer and for Binance — under legal and regulatory fire in various locations across the world, including the U.S., the U.K. and Europe — it’s bad news for the plethora of small cryptocurrency exchanges that make up Japan’s own bloated crypto trading market.
In Japan, “if you want access to the most coins, now you need to go to Binance,” said Norbert Gehrke, a former Wall Street banker and founder of the Japan FinTech Observer newsletter, in an online note. “Everyone else (i.e., the smaller exchanges outside bitFlyer, bitbank, Coincheck, …) are screwed anyway and many should fold.”
As of Aug. 31, when the list was last updated, there were 29 cryptocurrency exchanges registered with Japan’s Financial Services Agency (FSA). The number of tokens listed by each exchange varies considerably. But a number of Japan’s smaller exchanges offer as few as one to five tokens, with Bitcoin and Ethereum generally featuring alongside a smattering of other major altcoins such as XRP, Matic and ADA.
The global crypto downturn has been unkind to exchanges around the world, particularly since the collapse of U.S.-founded exchange FTX in November of last year. Investor sentiment has soured, with an estimated US$2 trillion wiped off a once US$3 trillion market over the course of the past 18 months.
And while Japan’s bigger crypto exchanges remain globally competitive — bitFlyer, Coincheck and bitbank often rank inside the world’s top 25 exchanges in terms of trade volume — smaller exchanges, already struggling over a lack of liquidity and an inability to differentiate themselves from their peers, are faring far worse.
See related article: Binance: One year on from FTX’s downfall
Some started life two to three years ago when Japan’s near-zero interest rates and an explosion of venture capital interest in crypto meant funding for projects was cheap and readily available. “The volumes were high, the prices were high,” said Gehrke. “Why not give it a shot?”
But now, amid a period of extended crypto winter, Binance’s official arrival on Japanese shores — plus the attendant fanfare that goes with it — has only accelerated their decline. “Not only are volumes down, but prices are down,” said Gehrke. “Commission rates are also down significantly. I just can’t see them surviving.”
Assuming the strongest and the fittest do make it through the current bear market cull of crypto businesses, how many cryptocurrency exchanges does Japan — a country with a notoriously low tolerance for high risk investments at the best of times — actually need?
“I’ll be generous and say Japan could do with three to five,” said Gehrke.
World’s biggest exchange
“Buying and selling cryptocurrencies just isn’t profitable anymore,” said the chief executive officer of one small Japanese exchange. “Of course, if there were millions of customers, things might be different.”
For now, however, business is so bad that the CEO asked not to include their name or the name of their company in this article for fear of things getting worse. Binance’s re-engagement with Japan, they said, could have a lot of positives for struggling exchanges, if just as a way of “brightening up” the market and restoring lost interest among investors.
On the flip side, they said, Binance is such a big name and arrives in Japan on the back of so much bad press that, if something goes wrong, it could be “very bad” for the industry. “The situation is pretty high risk,” they said.
Binance Global is registered with a holding company in the Cayman Islands. Officially operating in 45 different countries — although reportedly available in far more — the exchange’s website claims it has over 150 million users worldwide, enjoying a daily transaction volume of US$65 billion. But its relationship with Japan is complicated. It previously received two separate reprimands from the FSA in 2018 and 2021 for operating as an unregistered online exchange.
In November last year, Binance fast-tracked its official entry into the country. It bought the Sakura Exchange BitCoin platform and transferred that exchange’s Osaka-region registration over to the Tokyo capital region, forming Binance Japan KK. The move is part of an industry-wide expansion effort toward the Asia Pacific, where recent regulatory action and a favorable political climate in places like Hong Kong, Singapore and Japan have opened the region up as a crypto growth market at a time of increasing U.S. opposition to the industry.
Japan’s Prime Minister Fumio Kishida has referred to nationwide adoption of Web3 — a new phase of the internet built on decentralized blockchain technologies, cryptocurrencies and non-fungible tokens (NFTs) — as a key socioeconomic growth strategy. Pro-crypto government figures and industry advocates routinely point to the strength of Japanese regulation as reason for foreign investment by foreign firms, now including Binance, in Japan’s Web3 industry.
“It is likely that Binance attempting to create a new exchange in Japan would have taken years if it ever got somewhere,” said Mark Karpeles, former CEO of the collapsed Tokyo-based crypto exchange Mt. Gox. “Taking over an existing exchange gives them a shortcut into this very closed market.”
The ease with which Binance was absolved of past run-ins with the FSA in order to get a license prompted some Japanese exchanges to call out a double standard. There is a feeling, said Tokyo-based fintech lawyer So Sato, that Binance’s fast and loose approach to the rules has allowed it to amass huge sums of money, pushing it to the front of the line as the world’s largest crypto exchange.
“Some of their rivals feel that they were able to get a license here using that money,” Sato said.
Choppy waters
The FSA, when asked about Binance’s re-entry into Japan, acknowledged that it had warned the company about operating as an unregistered exchange in the past. But a spokesperson for the regulator said that it had no reason or, indeed, authority to prevent the purchase of Sakura Exchange BitCoin as a way for Binance to re-engage with Japan, this time as a registered entity.
Full steam ahead then for Binance Japan, as national director Takeshi Chino and his newly assembled team work through the process of transferring Japanese Binance Global customers over from the international platform to its domestic counterpart. Or not quite, given that Binance Global and its leadership structure, including CZ — whose alleged role in the FTX collapse has seen his actions come under the microscope — remain under intense regulatory and legal scrutiny elsewhere.
In the U.S., both the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) have charged Binance with operating as an illegal exchange. The U.S. Department of Justice is also reportedly preparing an investigation into violations of international Russia sanctions.
Elsewhere, criminal investigations into Binance’s operations are ongoing in Australia, France and, most recently, Brazil, while regulatory issues in Canada and a host of EU countries have seen the country beat a hasty retreat from those jurisdictions. On Monday, Binance said it will stop accepting new U.K.-based customers in compliance with the country’s new rules on overseas crypto promotions.
Asked if Binance Japan users should be worried about Binance Global’s legal trevails overseas, Sato said that existing regulation should protect Japanese investors in the event of an existential risk to operations. “If we assume that Binance Japan is obeying Japanese regulations by keeping 100% of Japanese customer assets in a cold wallet, the situation would be similar to the FTX collapse,” he said.
On that occasion, regulations ringfenced Japanese FTX investors from the catastrophic losses incurred by crypto traders in other jurisdictions as the exchange folded. “Even if Binance Global went bankrupt, I think Japanese customer assets would be protected. Of course there will be some effect, such as a two or three month delay in withdrawals, as there was in the FTX case. But the assets themselves will be protected,” Sato said.
High profile hacks on Mt. Gox in 2014 and fellow Japanese exchange Coincheck in 2018 led to the cumulative loss of billions of dollars worth of crypto at today’s valuations. In the aftermath, authorities came down hard on the industry, incorporating crypto assets into the regulations of its other financial systems from 2020. Those regulations require heavy investment in customer security and compliance.
The rigidity of regulation has led some international exchanges to question Japan’s viability as a profitable cryptocurrency market. U.S.-based exchange Kraken — where Takeshi Chino worked before joining Binance — left the country in January. Coinbase is also reportedly considering an exit due to the high cost of maintaining a licensed exchange amid low demand in the country.
Big fish, small pond
Those requirements exert an outsized strain on Japan’s smaller exchanges, many of which are no longer commercially viable.
“Definitely, there’s an oversaturation in the number of retail crypto exchanges compared to the demand,” said Justin Dhingra, chief strategy officer at Tokyo-based Web3 services platform Crypto Garage. “The question is: who are the active ones? I would say only around three are really making money. Last year, everyone was losing money. The rest are either for sale or they’re dormant.”
A call to Tokyo-based Coinhub Inc., a one-token (BTC) exchange first registered in 2017, suggested this is in fact the case. Despite still featuring on the FSA’s updated list of registered cryptocurrency exchanges, a nonplussed-sounding voice on the other end of the line said the company is no longer in business. It is now just a phone number, they said, despite the declaration on the company’s website that its services represent “the future of digital finance!”
The problem, Dhingra said, is that the future of digital finance in Japan appears less about cryptocurrency trading, where “the types of people are finance guys, the engineers, techies and product managers,” and more about exploring and building out the creative possibilities of Web3.
Japan, he said, is likely to experience success in developing a native digital economy by leveraging its existing strengths and intellectual property in video games, anime, manga. Which is why the bigger, more successful, even profitable Japanese exchanges have diversified to include services like Coincheck’s NFT marketplace — designed to make the most of those strengths rather than relying on one-note crypto trading services.
Holding Pattern
Whether or not that goal is a good thing for smaller exchanges is a matter of debate.
“Their [Binance’s] expansion to Japan is definitely positive for Web3 in Japan given that Binance is one of the top players across the globe, even though some of the local exchanges have strong opinions on this,” said Sota Watanabe, a government-affiliated Web3 spokesperson and the founder of the Astar Foundation blockchain development platform. Those opinions derive from a concern about the future, Watanabe said.
Many domestic exchanges have also spent large sums of money on compliance in accordance with local regulations, he continued, whereas “Binance didn’t do this so far. In that sense, I can understand what existing exchanges are saying.” Still, Watanabe added, “I hope Binance changes the status quo and makes the environment better for users, not for exchanges.”
For former Mt. Gox CEO Mark Karpeles, the amount of money required to maintain a licensed exchange means it is now difficult for anyone other than the biggest crypto companies to operate in Japan. “This is a strategy that results in a very closed market, very little competition and very little innovation,” he said.
But it may not be all doom and gloom for the licensed smaller exchanges — particularly those with the capacity to adapt as they wait out the ongoing crypto bear market.
Blockchain evangelist and a member of the Tokyo-based Blockchain Collaborative Consortium, Tatsuo Oku, said Binance’s official entry into Japan was “inevitable.” He said he now hopes the arrival of the world’s largest exchange will spark an influx of foreign interest in the nation’s Web3 industry in line with other jurisdictions like Dubai and Singapore, revitalizing the domestic market.
“Exchanges will maintain their registration in Japan and wait for these opportunities,” Oku said. They will just have to be “patient and wait for the right time to get the market going,” he added.
