The Journal The Authority on Global Business in Japan

ALTERNATIVE INVESTMENTS | FINANCE & BANKING

April 2014
Are Bitcoin Exchanges Actually Banks?
By Jake Adelstein

The troubled Mt.Gox K.K. Bitcoin exchange (CEO Mark Karpeles) filed for bankruptcy protection in Japan on February 28, saying it had lost nearly half a billion dollars worth of the digital currency in a possible theft.

On March 9, the company also filed for bankruptcy protection in the United States.

The meltdown of Mt.Gox, which is said to have controlled up to 7 percent of the Bitcoin—a virtual currency—in circulation, has drawn world attention to this still niche unregulated currency and skepticism about its value.

Further, the bankruptcy has created a tremendously pressing question for the Japanese government: should Bitcoin be regulated? Who should do it? Are Bitcoin exchanges such as Mt.Gox actually banks?

If they are, as one lawsuit pending judgment alleges, then Mt.Gox and its CEO have not only mismanaged the company, but they may have broken Japan’s banking laws.

Bitcoins, which exist in electronic form but can also easily be stored in paper wallets or USB keys, depend on a network of computers to solve complex mathematical problems to authenticate and record every transaction.

Investors deposit their Bitcoins in digital “wallets” at exchanges and can take the coins out, cash them, trade them, and, in some cases, purchase products.

However, the exchanges are not recognized as banks. With no deposit insurance, and the exchanges being outside of the banking system, if your coins are lost, you lose everything. One US system designer with a “deposit” in Mt.Gox lost $150,000 worth of them in the crash.

When Mt.Gox collapsed, Japan’s finance minister, Taro Aso, said at a press conference that he had always thought Bitcoin was suspect and stated the country might take action following the Mt.Gox debacle.

Surprisingly, there exists a tape-recorded interview of Karpeles in which he claims to have consulted the Financial Services Agency (FSA) about his business and was told no license was necessary. It may be that the Japanese government dropped the ball early in the game. The FSA would not comment on whether Mt.Gox had consulted with them in the past.

On March 7 the Japanese government said that Bitcoin trading ventures can operate freely under Japanese law. They asserted that Bitcoin is not a currency at all and is not subject to Japan’s strict banking laws. However, government sources said, “The actions at Mt.Gox may have violated existing laws. We leave that to law enforcement and regulatory agencies to determine on their own.”

But what if Bitcoin exchanges are recognized as banks by the Japanese courts? It would contradict the current stance that Bitcoin is just a commodity. Then suddenly the government of Japan would have to reevaluate the trading in Bitcoin; it would be possible that the operators of Mt.Gox are prosecuted for banking law violations.

Police sources say that such charges are being considered. It would also create a new precedent for the handling of Bitcoin, potentially putting all operators under the stringent regulations of a regular bank.

A lawsuit filed in the Tokyo District Court on December 24 by an American citizen claims that Mt.Gox is indeed a bank and that it violated the banking laws of Japan.

He had deposited almost $1 million with the company, but was unable to withdraw $10,000 on June 22 last year, which sent him into panic mode. It took him months to transfer out all funds. He asserts he was unilaterally charged a 5 percent handling fee for transferring the money and claims to have suffered damages due to Mt.Gox delays and its failure to act as a bank in good faith.

The case was filed as a “lawsuit demanding return of a deposit.” The filing notes: “The Banking Act also provides that no one without a license shall engage in banking services, which you (Mt.Gox) seem to be doing.”

The author of Legal Issues of the New Internet Currency Bitcoin in EU Law and German Law, Dr. Karl-Friedrich Lenz, a professor of European law at Aoyama Gakuin University, believes that Germany already requires Bitcoin exchanges to be licensed and Japan should, too.

“Mt.Gox takes deposits and holds them. Customers can withdraw funds. It wires money to other places. It is not simply an exchange. In accordance with Japan’s current laws it should have been treated as a bank. If Mt.Gox had been required to be licensed like the relatively new Rakuten Bank, this disaster might have been avoided.”

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Jake Adelstein has been an investigative journalist in Japan since 1993 and writes for The Japan Times, The Daily Beast, Center for Public Integrity, and several Japan publications. He is the author of Tokyo Vice (2009) and the forthcoming The Last Yakuza: A Life In The Japanese Underworld.

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