Noelle Acheson is a 10-year veteran of company analysis, corporate finance and fund management, and is a member of CoinDesk's product team.
The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered exclusively to our subscribers.
A relatively quiet and traditionally isolated market is about to set a precedent that could change the blockchain sector.
Last week, CoinDesk met with a group of representatives from some of Japan's blockchain startups and enterprise players. Conversation revolved around the upcoming regulation of cryptocurrencies, and the impact it would have on industry business models.
The consensus seemed to be that the new rules (a requirement to get a license from the Financial Services Agency, register with the anti-money laundering authorities and submit to periodic audits and inspections) would be good for the sector. Bestowing legitimacy will get both people and businesses more comfortable with alternative currencies, increasing volume, investment and network effects.
But that's not to say there isn't a cost.
One of the main risks is that the legislation ends up having the same effect as New York's 'BitLicense', driving out businesses and stagnating the local ecosystem. And while you could argue that the additional stability and security is worth the loss of innovation and choice, the resulting consolidation is a step towards centralization in a sector based on decentralization.
On the other hand, a likely consequence is that large financial firms will take an interest in the cryptocurrency business, looking to diversify their offerings and broaden their client base.
Already, finance giant SBI has invested in exchanges BitFlyer and Kraken, and announced plans to set up its own. FX broker Money Partners Group invested in TechBureau. GMO Internet set up a cryptocurrency wallet. And, this week, three of Japan's largest financial institutions participated in BitFlyer's latest funding round.
The inflow of institutional funds will not only add liquidity and respectability to the sector. It will also give startups the impetus to both strengthen their business at home and grow internationally.
A new direction
While that impact will be significant, a potentially more far-reaching one will be the change in banking practices that could result.
We see frequent reports of bitcoin startups in other high-tech, allegedly innovative, financial centers having to shut down because banks won't work with them.
Here, we have banks actually investing in or creating bitcoin businesses. The example set by Japanese banks could encourage a new tone in the global cryptocurrency sector.
We have become used to seeing banks dedicate resources and attention to blockchain projects. Although some have started experimenting on private versions of public blockchains, on the whole, banks have stayed away from bitcoin and its peers.
An increased interest in a different store of value, combined with a focus on improved processes, could lead to new innovations and use cases.
Don't dismiss Japan
To put this into perspective, we are looking at the potential symbiosis of two sectors that are both global leaders.
Could this lead to a 'co-opting' of alternatives to fiat by the gatekeepers of the fiat system? Possibly, but the question misses the point.
An eventual mingling of the two was always inevitable, either as a stepping stone or as an end goal. If the example set by Japan spreads, we could be at the threshold of that phase.
This will imply a cultural shift on both sides.
However, the fundamentals of bitcoin are unlikely to change. The fundamentals of traditional banking could.
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