Article by Forbes: Japan
Blockchain technology is advancing rapidly, but how important will it become in our daily lives? According to a World Economic Forum survey, in 2015 only 0.025% of global GDP was stored on blockchain technology but that ratio is expected to jump to 10% by 2027. As blockchain know-how matures, just about anything will be a tradable asset on a marketplace with a verifiable record of transactions.
Blockchain is a form of distributed ledger technology, which was first proposed in a series of 1990s articles by physicists W. Scott Stornetta and Stuart Haber. Cryptocurrencies like bitcoin are its most common application, and Japan has been at the forefront of blockchain technology and regulations due in part to large-scale hacking incidents at Japan-based exchanges. But after establishing clear laws governing cryptocurrency businesses, Japan is now incubating blockchain innovation through a unique regulatory sandbox system under the Cabinet Secretariat of Japan.
A new sandbox seeks players
In June 2018, the Government of Japan introduced the sandbox regime to accelerate the introduction of new business models and innovative technologies. Organizations and companies both in and outside Japan can apply to demonstrate and experiment with new technologies such as blockchain, artificial intelligence, and Internet of Things (IoT) in fields such as financial services, healthcare and transportation.
Unlike Japan’s National Strategic Special Zones such as Fukuoka City, sandbox experiments take place in virtual spaces and are not limited geographical regions. The purpose of the sandbox, however, is to check whether the new business will work in the real market. After the government evaluates the results of these trials, it plans to introduce deregulation measures. The sandbox system is thus a key policy under the Government’s reform-oriented Abenomics policies.
“Our sandbox regime is open to everybody and we try to make it possible for everyone to experiment as fast as possible,” says Hirohiko Nakahara, a counselor in the Economic Revitalization Bureau of Japan’s Cabinet Secretariat. “We must prove there’s a social benefit and that a new business is acceptable and practicable. The important thing is to make our market attractive.”
Engineering simultaneous crypto payments
Since its launch, the sandbox has approved six projects for experiments involving a wide range of business applications. One is an Internet of Things (IoT) trial by Panasonic in which household appliances will be tested through Power Line Communication (PLC), a technology that allows data to be sent via existing power cables. Another project involves a collaboration between security company Caulis Inc. and Kansai Electric Power Company to detect unauthorized openings of online bank accounts.
Cryptocurrency and fintech are also being developed in the sandbox. Tokyo-based cryptofinance firm Crypto Garage is looking at how to improve settlements between digital currency exchanges. Founded in September 2018 by IT group Digital Garage and money market brokerage firm The Tokyo Tanshi, Crypto Garage is focused on developing trustless financial services based on bitcoin and blockchain technology.
With a staff of about 20, Crypto Garage was chosen for the sandbox program because of its unique settlement technology called SETTLENET and its plans to develop the business in Japan and overseas. SETTLENET is a suite of products providing digital asset services for Canadian blockchain infrastructure startup Blockstream’s Liquid Network, which is an international settlement network for cryptocurrency exchanges and institutions. As a sidechain for traders who use exchanges, Liquid has about 35 members from nine countries.
For its sandbox proof-of-concept experiment launched in January 2019, Crypto Garage will provide several cryptocurrency exchanges in Japan with access to SETTLENET so they can use a stablecoin pegged to the Japanese yen. The JPY-Token is the first stablecoin of its kind approved by the Japanese Government, and can be traded against Liquid bitcoin (L-BTC), which is pegged to bitcoin. The intention is to enable rapid, secure and confidential transfers of digital assets without counterparty risk. Thorough this sandbox, Crypto Garage will also check for unlawful trades and money laundering as a proof-of-concept administrator.
“With this technology, it’s simultaneous delivery and payment and no intermediary,” says Crypto Garage President Masahito Okuma. “This is first use-case for JPY stablecoin and blockchain technology to solve the delivery versus payment problem. There are no other players doing this.”
Crypto Garage availed itself of the sandbox regime because Japan did not have a regulatory framework for the new business model. If the one-year experiment goes well, Crypto Garage hopes to bring the technology overseas after reporting its results to the Cabinet Secretariat and evaluating its potential economic value. The company sees a lot of potential in cryptofinance and its benefits of greater transparency and equality for players.
“I think the Japanese market is very interesting,” says Okuma. “The government is very progressive in promoting new financial systems under the regulatory sandbox. We have talented technology resources internally and we’re trying to match these with Japan’s progressive policies to expand the range of financial solutions.”
New frontiers in blockchain
Crypto Garage isn’t the only Japanese startup initiating new business by harnessing the power of blockchain technology. Founded last year, Tokyo-based BC Technology Laboratories is a one-stop shop for blockchain services, offering clients strategic consulting on business plans, product development and financing. It’s led by co-founder and CEO Yoko Fukata, a software engineer works full-time in business development at a major Japanese electronics maker.
A few examples provide insight into BC Technology Laboratories’ business. It recently partnered with the city of Kakegawa, a municipality of 115,000 people in Shizuoka Prefecture, to digitize part of its social benefits program with blockchain technology to better protect data and prevent fraud. It’s also working with Japanese animation studios to develop a transparent, tamper-proof intellectual property rights management ecosystem powered by blockchain.
It’s aimed at fighting anime piracy and delivering authentic content to fans worldwide. The Trinity Co. project has brought together major players in the industry and the Manga Japan Association.
“With the traceability of blockchain, you can systematically know who owns the rights to any given content, and see how the revenue is shared,” says Fukata, who set up BC Technology Laboratories along with Hideki Arai, a serial entrepreneur who serves as chief operations officer. Now with about 12 staff, the startup is also working on security technologies to ensure safety during drone flights.
Fukata established BC Technology Laboratories because she saw tremendous benefits in blockchain technology but also hurdles to adopting it including doubts among the public. She’s keen to work with companies outside Japan to develop the technology to benefit society.
“With the nature of this technology, it doesn’t matter whether our partners are in Japan or overseas—we’re open to everyone worldwide,” says Fukata. “Our goal is to create a world in which everyone is using blockchain technology seamlessly, without knowing it.”