The February 2014 collapse of Tokyo-based bitcoin exchange Mt. Gox was, for more than 24,000 investors around the world, a traumatic event. It also ushered in a two-year crypto bear market that saw the price of a single bitcoin plunge from a peak of $1,200 to a low of around $200 before the torrid bull market of the present day began. And as the bankruptcy and legal issues surrounding the collapse continue to wend through the Japanese legal system, none of these investors have received a single crypto cent of remuneration – despite the ballooning valuation of the exchange’s remaining assets.
Many market observers believe that one of the biggest risks to the current rally would be a similar incident unfolding across another major exchange like Bitfinex or CoinBase’s GDAX.
So in a move that could go a long way toward legitimizing the burgeoning crypto market, Japanese banking behemoth Mitsubishi UFJ Financial Group which is Japan's largest financial group and the world's second largest bank holding company – through its trust and banking unit – is preparing to launch a service that will allow individual investors to secure their bitcoins in the event an exchange should fail again, according to Nikkei Asia Review.
MUFG isn't the only major global bank seeking to build up its cryptocurrency franchise: Goldman Sachs is reportedly in the process of launching a crypto trading desk. Of course, as observed recerntly, Japan is one of bitcoin’s biggest markets, and its largest exchange, Bitflyer, accounts for nearly 40% of global exchange-based trading.
MFUG’s new trust service would help mitigate what has, in the past, proven to be one of the biggest threats to the crypto market. It will also help Japanese regulators cement their position at the vanguard of crypto’s integration with traditional markets.
Mitsubishi UFJ Trust and Banking is preparing a scheme for protecting holders of cryptocurrencies if the exchanges they use fail - a risk that veteran fans here know all too well.
This highlights how Japan's finance industry seeks to make the most of the opportunities associated with virtual currencies, which the country has taken to in a big way, accounting for around 40% of global bitcoin trading.
Japan was also the epicenter of one of the digital currency's biggest shocks -- the 2014 collapse of Mt. Gox, the largest bitcoin exchange at the time.
Mitsubishi UFJ Trust will offer a way to keep exchange customers' cryptocurrency holdings separate from the entrusting exchange's assets. This will make it the first trust arrangement of its kind in the world, according to the Mitsubishi UFJ Financial Group member, which recently applied for patent protection.
Per Nikkei, the service could launch as early as April, when Japan's Financial Services Agency is expected to recognize cryptocurrencies as an asset that can be placed in trust, like real estate or securities.
While the market value of major cryptocurrencies has ballooned to $300 billion, bitcoin and its peers have remained remain decentralized creations without an oversight body like a central bank – a core component of their appeal. But as the usage and valuation of digital currencies grows, these exchanges, which are often overwhelmed and under-staffed by the flurry of new accounts, they’re increasingly becoming targets for state-sponsored hackers like the North Korea linked Lazarus Group.
As Nikkei explains, Mitsubishi UFJ Trust will maintain the same records as its exchange clients. In the event that the exchange operator fails to safeguard its customers’ assets, Mitsubishi UFJ will use these records to compensate investors for their losses.
Of course, this service won’t protect customers from violent plunges in the valuation of bitcoin, like the selloff that occurred over the weekend during the runup to the Christmas holiday.
Using an arrangement like Mitsubishi UFJ Trust's would entail a fee that would be shouldered by individual investors. But "customers will feel peace of mind knowing that a trust bank is managing their assets," said CEO Noriyuki Hirosue of Tokyo-based exchange Bitbank. After all, the big banks have never violated their fiduciary duty to their clients – therefore, they’re implicitly more trustworthy than crypto startups with few resources and little to no track records.
To use the service, exchange customers will opt in when they start trading. Mitsubishi UFJ Trust will monitor the accounts of those who do for suspicious activity and examine pending transactions in detail as needed. A late-night sale of a huge amount of bitcoins, for instance, would get flagged for inspection instead of being processed immediately.
While regulators in the US have expressed skepticism about digital currencies, Japan established itself as a leader in building a regulatory framework when nearly two years ago, it passed a law clearing the way for financial institutions to become involved in the crypto market.
The Japanese recognize the adoption of cryptocurrencies and blockchain technologies as a competitive advantage, and they're right. The FSA began registering cryptocurrency exchanges in earnest this past autumn.
Offering this service will help establish one of Japan’s largest financial institutions as a key player in an increasingly contested global market, which has seen a surge of institutional interest in the trading of cryptocurrencies in recent months.