It wasn’t long ago when Japan was an early mover in the region to recognize Bitcoin as legal tender and endorse 11 cryptocurrency exchanges last year. Japanese companies like Rakuten and Line were launching exchanges or their own coins amid the global thrill of skyrocketing Bitcoin prices. Even as China made sweeping bans to ban trade on exchanges and the launch of new crypto coins and South Korea threatened to follow suit, Japan appeared to be the voice of hope in a continent swept in uncertainty.

But the sting of a $500 million hack on local exchange Coincheck in January has put Japan’s reputation as a blockchain-friendly environment to the test. Once dubbed a crypto haven that lured foreign companies to set up blockchain and cryptocurrency projects, the mood has darkened in the country as authorities attempt to rein in the market, industry sources say.

Before the hack, people dove into crypto fever without regard for how to protect themselves or secure their assets; the concept was red hot, just like in South Korea, says blockchain entrepreneur Koji Higashi, who cofounded Japanese crypto wallet IndieSquare. “They were just interested in knowing which coin to go to next.”

Bitcoin prices in Japan reached fever pitch last year along with the global trend.

But the optimism masked problems bubbling under the surface. Despite regulations on exchanges and ICOs newly established last year, scam ICOs found the opportunity to flood Japan, taking advantage of people’s low understanding of the technology, Higashi says.

 Selling unregistered tokens is illegal, as every ICO must work with a local licensed exchange. But foreign ICOs still managed to trickle into Japan when local companies invited entrepreneurs from overseas to host seminars or workshops, where they would then sell their coins to their followers, according to Higashi.

On top of that, he adds, exchanges have prioritized convenience over security to win over users. Coincheck, which marketed itself as being user-friendly and convenient for impatient beginners, had been managing users’ funds on a hot wallet–an online crypto account that transfers funds faster–rather than a more secure cold wallet, which is stored offline like a vault and much harder to hack.

Japanese regulators appeared either positive or neutral about cryptocurrency, giving the country a default reputation as a haven compared to hardline countries like China. But that’s mostly because they were toeing a gray line, Higashi says.

“It’s not that Japan is an ICO haven, but there is no enforcement, and we will see massive issues in the future,” Higashi says.

Then, on Jan. 26, the Coincheck hack: The exchange’s users lost $530 million worth of NEM tokens in the second largest crypto heist in Japan after Mt.Gox in 2014. Only then were regulators forced to face the music, as the issue became highly publicized in local and foreign media.

The Japanese government had wanted to promote fast growth of the cryptocurrency business, becoming first movers in regulation, says Katsuya Konno, chief financial officer of Japanese exchange operator Quoine. “But due to the Coincheck hacking, the FSA [Financial Services Agency] turned the strategy from growth to monitoring.”

After the hack, the FSA were focused on two things: investigating exchanges to prevent another hack and cracking down on scams and illegal ICOs. They ensured that exchanges were managing customers’ funds with basic security measures, criticizing a handful of exchanges including Coincheck for poor internal control.

One reason Coincheck was the target of a hack, Higashi notes, is that its wide offerings of non-mainstream altcoins, each with their respective characteristics and specifications, bring security risks of their own as it’s difficult to secure every framework. – Elaine Ramirez (ForbesAsia)

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