Responding to the Surge in Crypto Crime: Japan Implements Stricter Regulations

For decades, Japan has maintained one of the world’s lowest crime rates, gaining it a reputation as one of the safest places to live worldwide. The year 2022, however, marked the end of a 20-year streak of decreasing crime reports. According to the National Police Agency (NPA), there were more than 601,000 crimes recorded in 2022, a single-year increase of 5.9%.

“While these figures are prone to be influenced by police policies and whether or not victims file cases — among other elements — they still do reflect a general ebb in criminal behaviour in Japan over the years,” explained Kenji Omata, a criminal psychology professor at Surugadai University to The Japan Times.

A number of different factors might explain the rise in crime reports between 2021 and 2022, including the end of COVID-19 health and safety measures, changes in how crimes are recorded and Japan’s aging population.

With the end of pandemic-related precautions, people naturally began returning to life as normal in Japan. As a result, it is unsurprising that the number of street crimes increased compared to data from 2021 when there were fewer people on the streets. Criminologists have also suggested that the rise in documented crimes reflects an increase in police attention to domestic violence and sexual abuse cases, which in the past were likely under-reported.

Another thing to consider is Japan’s aging population. With technology developing at such a rapid pace, the elderly are often considered an easy target for phone and internet scams involving illicit money transfers.

Money Laundering Problems

Japan’s 2022 crime report also revealed an increase in money laundering transactions, which hit a record high of 583,000 cases, compared to 53,000 the previous year. While this spike is certainly a cause of concern, money laundering schemes are by no means new to Japan, where there have been several major cryptocurrency hacks in past years.

Back in 2014, the Tokyo-based bitcoin company Mt.Gox collapsed after it came to public attention that US$ 400 million had been stolen from its network. Despite this setback, Japan remained one of cryptocurrency’s leading supporters among world nations. In 2017, Japan recognized bitcoin as a legal currency.

In January of the next year, however, Coincheck raised alarm when it admitted to losing US$ 534 million in a cyber-hacking attack. Although Japan’s Financial Services Agency (FSA) began to inspect and review exchanges in cryptocurrency more closely following the incident, illicit crypto activity continued.

According to National Police Agency data, cryptocurrency money laundering cases increased 10-fold in Japan in 2018. In early 2019, Nikkei, Japan’s leading financial agency, reported that international money laundering was “rampant.” According to the agency, Japan’s large number of small and midsized companies, which participate in frequent overseas business transactions, make the country a prime location for criminal organizations hoping to disguise their illicit activities.

International Concerns

In June 2019, the Financial Action Task Force (FATF), a global money laundering and terrorist financing watchdog, updated its “travel rule” to address the international rise in cryptocurrency money laundering. In its update, the FATF strongly recommended that all crypto transactions beyond a certain threshold be required to identify both the sender and the receiver. However, as the FATF has no regulatory power, choices regarding compliance are left up to individual countries.

Although Japan was among the nations that chose to adopt the new “crypto travel rule,” its regulation policies were at first considered relatively lax compared to others across Asia and the European Union.

Before the 2018 Coincheck hacking attack, Japan had been widely-recognized as a leader in the crypto world. Following the incident, however, the FSA began to crack down on crypto companies in an effort to control money laundering and terrorism. These stricter regulations angered many crypto businesses leaders, who argued that the FSA’s interference hampered their operations and ability to attract investors.

According to Yuzo Kano, co-founder of Japan’s largest cryptocurrency exchange, bitFlyer Inc., the public alarm and government intervention that followed the 2018 incident changed Japan from “the crypto epicenter” of the world to a nation that’s “seen nothing but stagnation for the past four years.”

Despite his clear frustration that Japan lost its “first-mover advantage as an early crypto adopter,” Kano remains hopeful that the nation can “make a fresh start” and return to its frontline position in the crypto world.

Recent Efforts

Regulating crypto companies without stifling their progress is a challenge for many world leaders, especially as money laundering in cryptocurrencies has been on the rise internationally. According to U.S. blockchain analysis company Chainalysis, crypto laundering hit a record high in 2022, totaling $23.8 billion, a year-to-year increase of 68%.

In another recent report, Japan’s leading financial agency, Nikkei, stated that between 2017 and 2022, Japan was the “biggest loser of crypto due to North Korean hackers.” During this period, Japan’s losses totaled $721 million in crypto assets, which is 30% of the global sum of US$ 2.3 billion stolen by North Korea.

In response to growing global concerns over digital security, updating the “crypto travel rules” was one of the main topics discussed at the 2023 G7 Summit, which took place in Hiroshima in May.

In the weeks leading up to the meeting, FATF President T. Raja Kumar urged the leaders to consider the consequences of failing to apply the “travel rule” to crypto assets. “Illicit financial flows weaken the global financial system, delay growth and hinder development,” he stated. “They fuel serious crimes – such as terrorism, drug trafficking, human trafficking, corruption and environmental crime – that threaten our safety, security and society.”

Acting on this recommendation, Japan created new cryptocurrency guidelines requiring exchange operators to share information identifying customers, including the name and address of senders and recipients. These tightened policies went into effect on 1 June. While some crypto companies are skeptical of the new rules, Japan’s previous efforts to increase regulations following the Coincheck incident have so far proven to be beneficial in times of crisis.

Late last year, Japan’s crypto protections helped the country’s clients retain their assets after the failure of FTX Trading Ltd. Many other nations, whose customers’ funds weren’t as well-protected, began to consider adopting stricter policies like those in Japan.

The new rules issued by Japan’s FSA in June show an even further effort to combat crypto laundering by creating a trail for crypto transactions. While these regulations are somewhat stricter than those issued previously, they still contain many loopholes for example transactions between individuals without using an exchange.

Whether Japan’s streak-breaking 2022 crime spike was an anomaly in a downward trend or the start of a new rising tide remains an open question.

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Article by Fatima Abuzar.
Editing by Anrike Visser.