Japan's Privacy-Crypto Ban Is Bad For Specific-Use Cryptos But Good For Generic Ones

by: Erich Reimer


Japan's financial regulator will be banning cryptocurrencies that offer enhanced privacy features, including Monero, Dash, Zcash, Augur, and others, amidst worries over being unable to track nefarious activities.

Privacy blockchains have boomed this past year and showed great potential due to public demand for privacy, and the failure of regular Blockchains to offer any real level of anonymity.

Japan has been a major source of crypto demand and a friendly regulator, making this move slightly worrying both in immediate impact and if other regulators follow suite.

It also introduces the possibility of differing crypto-regulation by sub-sector, particularly as many cryptos are made to be specialized or offer distinct functions that make them very different from other.

Though the ban is obviously negative for the privacy-oriented cryptos involved, it's a small boost to general use cryptocurrencies that may not face similar regulatory risks for their specific functionality.

Japan's primary financial services regulatory body, the Financial Security Agency or FSA, will be implementing a ban on cryptocurrency trading for cryptocurrencies that offer enhanced privacy and anonymity features.

The ban, long rumored and officially to take effect on June 18, most notably right now delists large privacy-oriented cryptocurrencies such as Monero (XMR-USD), Dash (DASH-USD), Augur (REP-USD), and Zcash (ZEC-USD), among others.

To put that into perspective, according to CoinMarketCap, Monero is currently the 13th largest cryptocurrency with a $2.492 billion market cap, Dash is the 14th largest with a $2.463 billion market cap, Zcash is the 23rd largest with a $971 million market cap, and Augur is the 45th largest with a $395 million market cap.

These privacy cryptos together account for roughly $6.32 billion, which is a paltry day's volatility to Bitcoin's (BTC-USD) (OTCQX:GBTC) still sizable $125.820 billion market capitalization at the moment or Ethereum's $55 billion. Nonetheless, these privacy cryptos have in particular seen major growth over the past year due to public interest in privacy-based transactions.

Furthermore, these privacy cryptos also seemed appealing as they initially appeared to have potential greater lasting ability due to offering a real distinctive benefit.

(Source: CoinMarketCap)

These market capitalization and ranking numbers are all after their market price plummets in the wake of the news, as Japan has been a major source of inflows into cryptocurrency over the past year. Even at the moment, Japan still retains about 70% of Bitcoin-fiat exchanges, with the U.S. dollar only second at a distant 18%.

As shown below, these privacy-oriented cryptocurrencies dropped at a significantly greater level, roughly 25% to 30%, than Bitcoin has in the wake of news about the Japan FSA ban.

Chart Bitcoin Close Price data by YCharts

Cryptos Originally Were Misperceived As All Offering Privacy, Then Privacy Cryptos Actually Did It

Japan's financial agency is apparently outright banning these cryptocurrencies that offer enhanced privacy functions because of worries over money laundering. Money laundering and other nefarious and criminal activities have to a degree relied on these cryptos', especially Monero's, identity scrambling and masking features.

Though Bitcoin has been misconceived as offering privacy, it in fact tracks transactions in a very public and easily traceable way for those who know how to read the Blockchain.

Privacy-oriented cryptocurrencies have sprouted up to offer a level of information protection in an age when it seems data is increasingly wide out in the open. Just like how public sentiments against brazen company use of personal data appear to be increasing in the post-Facebook Cambridge Analytica world, interest in privacy-based cryptos did too.

(Source: CoinMarketCap)

The regular consumer without any nefarious intentions may have a real interest in privacy for their financial transactions. This real distinctive benefit is why these privacy cryptos initially seemed like a new sub-sector of cryptocurrencies that could have lasting appeal. Yet if Japan's new regulation stays or even catches on, that could all be wiped away.

A New Type Of Regulation Regimen For Specialized Crypto Sub-Sectors?

Japan's new ban is interesting from a regulatory standpoint as well because it offers another potential regulatory option as governments are in the process of laying down a large series of new rules on the entire cryptocurrency process.

For most of the past few years, Japan has been relatively friendly to cryptocurrencies, perhaps the most so of major economic nations. Japan even allowed the creation of a self-regulatory organization for exchanges among other general regulatory friendliness to honest actors.

That Japan would go and outright ban privacy cryptocurrencies, despite being an overall friendly regulator, shows that there may be some worries for certain kinds of cryptocurrencies out there.

Cryptocurrencies have blossomed in the past year to now already an immense variety that each has its own distinct features and functions. These sub-sectors range from being a computational program to offering rewards to increased privacy protections.

It remains to be seen if Japan's FSA action is lasting or only temporary. It could very well be that Japan is merely experimenting with banning these privacy cryptos and might reverse it if public sentiment so demands.

(Source: CoinMarketCap)

I actually recently had the chance to chat with Zcash's COO about privacy cryptos and regulation - listen below or read the article here.

Crypto-Investment Impact

Whether Japan's regulatory actions catch on remain to be seen, but for the moment undoubtedly, they have a negative effect on the market price of privacy-oriented cryptos.

As mentioned previously, Japan has been a major source of crypto-demand, and the removal of it from the market might severely dent volume and growth in privacy coins.

In contrast, it may strengthen interest in other cryptos very slightly as some of the demand from privacy cryptos now flows to other ones. There is not exactly a complete transfer of demand, as privacy coins attracted interest precisely because of their privacy aspects that other coins didn't have.

(Source: CoinMarketCap)

In terms of long-term investments, it also changes the fundamental outlook in making it possible that certain cryptocurrency sub-sectors may face differentiated regulation.

There are now still over 1,600 cryptocurrencies, with they being either general use (such as Bitcoin) or "altcoins," "tokens," or some other more complex software that offers different features from a standard Blockchain. As Japan's approach indicates, these specific-use cryptos may face higher-levels of regulation if they are considered especially dangerous to regulators.

Attributes that likely would attract regulatory attention to these tokens/altcoins include elevated danger to public consumers or potential use in nefarious and criminal activities.


Japan's ban on privacy-oriented cryptocurrencies is interesting within itself because of its effect on these various distinctive privacy-based cryptocurrencies that seemed to, and may still do, have so much potential.

It also introduces a new potential type of regulation for cryptocurrencies, as the blossoming of so many crypto sub-sectors may invite differentiated regulation depending on the exact function of the crypto itself.

Whether Japan reverses its ban or if it stays and becomes a model for other nations remains to be seen and should be closely watched. If sub-sector bans seem to not create too much public and industry blowback, they have a better possibility of catching on and dramatically shaping this current "new" stage of cryptocurrency development.

If the sub-sector-specific regulation catches on, that may mean the current rapid development of sector-specific cryptos may slow down while general use cryptos return again to prominence.

Nonetheless, the immediate impact is likely a reduction in demand for privacy coins due to Japan's market share in overall crypto demand and volume. There likely will be a small increase in general use coins, such as Bitcoin, as some of that newly freed demand partially flows to other coins.

In the longer term, this means specific-use cryptos may face increased and specific scrutiny by governments if they are potentially usable for nefarious activities or have too great a risk to the consumer public.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.