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Despite the exit of international digital exchanges from Japan, industry stakeholders argue that Japan is setting the pace for healthy regulation of its digital currency ecosystem, reports the Economic Times.

Japan demonstrated its foresight after it launched a stablecoin pegged to the yen, ahead of the curve of the craze of central bank digital currencies (CBDCs). The country’s regulators laid the foundation for several financial institutions to dabble in stablecoins, with banking giants Mitsubishi UFJ Financial Group launching a yen-backed offering.

Digital currency service providers seeking licenses in Japan are typically held to a higher standard than in other jurisdictions. Japanese regulators require digital currency exchanges to ensure a clear separation of clients’ funds to avoid commingling assets, regular audits, and an additional requirement to store a large chunk of assets under custody in cold wallets.

Experts noted that a combination of the stringent licensing requirement shielded Japanese investors from the FTX implosion in November 2022. While FTX’s customers were left holding empty bags, users of the exchange’s subsidiary in Japan were allowed to withdraw their assets.

However, Japan’s government has not always been proactive with its digital currency industry but was jolted into action following the hack and eventual collapse of Mt. Gox exchange. Buoyed by the collapse, regulators scrambled to institute guardrails to protect investors leading to Binance leaving the country for four years.

Content with the state of regulations for exchanges, Japanese authorities moved to support other Web3 niches, including the metaverse and non-fungible tokens (NFTs). In 2022, Japanese Prime Minister Fumio Kishida unveiled a new strategy to improve the country’s digital economy revolving around blockchain and the metaverse, pledging to explore multiple use cases for the technology.

In search of new use cases, the government turned to digital collectibles to reward seven mayors for their exemplary achievements in promoting the adoption of new technology.

Despite loosening its grip on the industry, the government imposed stricter anti-money laundering rules (AML) for digital currencies. The new move sees the country ratify the “travel rule”—a recommendation from the Financial Action Task Force (FATF), requiring service providers to report details of digital currency transactions exceeding $3,000.

Exits dampen Japan’s aspirations

In January, Coinbase (NASDAQ: COINannounced that it would be shutting down its operations in Japan after barely two years, citing macroeconomic factors for the exit.

“Due to market conditions, our company has made the difficult decision to halt operations in Japan and to conduct a complete review of our business in the country,” the announcement read. “However, we are committed to making this transition as smooth as possible for our valued customers.”

Coinbase’s announcement comes on the heels of Kraken’s disclosure of an exit over a “weak crypto market globally.” Experts noted that the high-profile exits put a dent in the ambitions of the country to establish itself as a leader in the digital currency industry.

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