Elsa Madrolle on cryptocurrency regulations in Japan

0:00I'm Ashley Addison from event chain for investmentpitch media and FinTech news network and today on blockchain interviews with Al Simmons roll the International GM of coolbut X Elsa thank you so much for taking the time to come on the show it's a pleasure to have you here today thanks Ashton you're very welcome I'm excited to dive into coolbut X you

0:20know we've spoken before and I know that your team has released a hardware wallet in the coolwallet s but you also lead the industry through innovation in security can you talk about the main focuses of cool bit X right now and the breadth of your services yeah sure so um cool bits was founded in 2014 by Michael o whom you know and you are absolutely

0:41right initially we were focused on making wallets we released the cool wallet S which was first Bluetooth credit card-sized mobile Hardware wallet on the market it's still around and we continue to create branded and enhanced versions of it for different clients but that's a product directed to the end-user market but as we were working with one of our largest clients of of

1:02that wallet we realized that they actually had other concerns specifically around regulation and how to go about starting to become compliant with some of the new rules that were being announced so we realized that they had we have technology in house that could be adapted to help them and so we built it out specifically this year as a result we're spending a lot of time on

1:20what's called the travel rule which is the compulsory exchange of sender and receiver information transfers between crypto exchanges so we've evolved into becoming a blockchain security solutions provider for institutions that's great and it's so interesting how companies can adapt like this where as you know there are a lot of security protocols that need to be put in place for

1:41exchanges to keep their funds safe but if they don't have the proper compliance you know having a hardware wallet or having cold storage there can still be infiltrations and there sort of needs to be security you know all around so I know that your company has been focused on the crypto regulatory environment in Japan and there are a lot of Japanese

2:01exchanges could you talk about what does the current regulatory environment look like in Japan right now and how popular is that and is it growing sure I mean in in Japan if you're looking at regulation you got to kind of keep in mind the backdrop a very very tough traditional investment environment in Japan you've got negative interest rates for years

2:19equity markets that never really recovered the peaks of the 90s you've got tough FX markets in Japan so people really start to have to look outside of Japan for returns it's not really a surprise to me that crypto is so popular in Japan as a result but since the hacks over the years you know to the largest tax in the industry in Japan the government the Japanese government's

2:38been under a lot of pressure to protect consumers on the back of that so generally when a government needs to create regulation a country has a choice they can either start from scratch and create brand-new regulation you see this in some of the offshore markets or if they already have an established financial system it's usually easier and they'll tend to just amend their

2:58existing regulations so that's obviously what's happening in Japan so around this time last year the regulator announced that there was a new slate of regulation approved and that it would come into effect around April 2020 and then they went silent for a while and then they attend announced a few weeks ago that it was gonna be made first up this year so

3:16the industry was shocked but really shouldn't have been I mean we've known for a year that it was coming and Japan has its history but obviously on top of that we've got Kovach mine team means cyber crimes on the rise we've had regulators around the world in a race against the clock with organizations like the Financial Action Task Force telling countries that they need to be

3:34ready by the end of the year so from May 1st Japan has regulation coming so some of the key points of that regulation in order to run a crypto exchange in Japan going forward you will need to either a be a fully licensed Japanese entity with a license from the Japanese FSA or be and have a similarly licensed entity in your own country before you're able to

3:58get that Japanese license now that's saying a lot because there are very few countries that are gonna be as stringent as Japan and so that's really setting the stage for who they're going to accept you know not a lot of countries you can think that maybe the US but maybe not China you know so you can you can already see where where that's going with that to get that license it's a

4:18capital requirement of 10 million yen that's 450 thousand US dollars a lot of money and then one of the key developments is that the exchange is going to need to segregate customer deposits from their own cash flows so that's gonna develop the use of what you were saying recognize custodians through cold storage and if they don't do that or the the end-user insists on keeping the

4:40their their crypto in a hot wallet on the exchanges hot wallet then the exchange will have to hold the same types of assets and same quantity to be able to pay them back in case of a hack and that's a pretty unusual development and a pretty strong stance that the government's taking hmm wow that's quite some stringent rules potentially limiting you know competitive

5:03environments do you see this as making it harder for exchanges to come in and creating sort of an oligopoly of the large exchange is taking over is this good for you know cryptocurrency adoption and for the users of traders in Japan that are trading cryptocurrency I mean it depends on what you mean by good right is is is good defined as the price of bitcoins gonna rise um you know what

5:31what what you want what I think we all want is for this industry to stick so to speak and for ultimately users to have a safe experience and eventually have institutional investors coming in and so these are all necessary things that need to happen before that can that can take place do regulators need to go as far as Japan went unfortunately Japan was hit with with

5:56such you know such serious hacks that they have had to to go all the way I think what you'll probably see in the rest of the world is a more gradual adoption to regulation than what Japan has done so ultimately I personally believe that this is good for the industry now I come from you know two decades of traditional financial services so I would say something like

6:19that but it will be growing things you are gonna see some of the smaller exchanges maybe not necessarily go out of business but you know they may have to merge with each other they may get bought by the bigger exchanges yes you may you may end up with an oligopoly as itself but there are too many exchanges anyways oh I don't think that's that's a bad thing mm-hmm

6:37yeah I I agree with you on that point and you also mentioned there about custodial you know holding of the users funds by the exchanges you know with a hot wallet the exchange has access to the private keys of the users so that they can help facilitate the trades between Bitcoin and other cryptocurrencies but they in this new regulation they need to be able to pay

7:03back a hundred percent of those funds and have all of those funds held you know for example in Canada when the quadriga CX exchange infamous exchange didn't have the funds it seemed many of these exchanges are holding funds you know it shows the number in your account but they may not be holding those funds they may be moving them around or or lending them

7:24out on reserve right so how do you see this affecting cryptocurrency exchanges in Japan at least do you think that they were lending out funds before or is this going to be a drastic change for them having to hold all the funds or was it already like that that's that's an interesting question I think I think well I mean everyone understands now you know in hindsight is twenty-twenty that

7:52that it is a bad idea to hold anything or anything more than what you want to trade on a day to day basis and hot wallet I think there's still a large misunderstanding between what is a hardware wallet and and what is considered cold storage so a hardware wallet just to be precise lets you store your encryption keys access your crypto but you're really just relying on the

8:11hardware to access your data whereas a cold storage solution is one step further whether that's through you know while a device or another solution it requires both software and hardware authorization so it's actually much more secure so yeah from next month all exchanges in Japan are gonna have to offer not just hardware while it's but a real way to manage users money

8:30separately from their own cash flow on so effectively they're gonna have to find cold storage solutions for customers or be ready to reimburse them what's in the hot wallet what what what that's gonna mean in my opinion is that the exchanges are probably going to charge you more to hold your your assets and a hot wallet it's a pretty big incentive to get

8:50everybody up and running in cold storage and you know this is nothing new in Japan actually we launched a pilot program with SPI virtual currencies in 2019 that allowed their users to withdraw their assets from their hot wallets to dedicated kyc cold storage wallet and that program was actually a success that was ahead of the regulation coming and you know we're looking at those types of

9:13solutions and how we can continue to offer these types of things to you know an evolving market mmm-hmm one of the reasons that traders prefer to keep their coins on exchange in a hot wallet is for easy access to trade them you know within seconds of the price moving to be able to not have to go get a hard wallet from wherever you're storing it plug it in transfer to the exchange

9:37you know there's quite a delay in time is there going to be a difference between you know cold storage wallets that are built into exchanges that aren't necessarily a dedicated Hardware wallet that can be pulled off line versus you know the cold storage that's just a treasure or a ledger or cool wallet s is there gonna be a major difference I think you know I think

10:00that's just innovation I think when when whenever things like this happen everybody throws their arms the other going this is crazy this is gonna change this and it affect my business model I'm not gonna trade my cable to do this and then over time people digest the news and they figure it out so I I think we will see innovation in the space and you

10:20know it may put some providers out of business and you have to be agile in the space so yes I think I think we will start to see drastic improvements you know it's the analogy is the Internet of you know the late nineties where you had the terrible sound where as that as the router was trying to connect you know compared to what we've got to say yeah I

10:41guess it's moving from the Wild West to the the mild west and I also saw that coolbut is working outside of Japan you know into Canada where we are and other countries as well do you see other countries following suit with what Japan is doing or how do you see this expanding out globally yeah I think you know um Canada is an interesting one because you suddenly

11:08your government suddenly announced regulation that I think people were not expecting to move so quickly and that was definitely I think it intended to meet the the fad of guideline of June 2020 for compliance so Madoff is the Financial Action Task Force they issued guidelines last year in June 2019 or countries regulators to issue regulation

11:37around things like the tribal rule etcetera and so the Canadian regulator actually you know issuing this ahead of June is is sending a strong signal so you are seeing it across the world I think we're gonna we're going to continue between now and probably the end of the year to see headlines probably every week right there's 30 weeks left in the year we're probably

12:00gonna see 30 countries at least one a week coming up with headlines about this is how we're gonna do it and everyone's trying to get to the same place but you know different countries have different experiences based on the level of criminality they've got in their own country and and and generally their appetite for you know regulations stringent regulation or not mm-hmm yeah

12:21well that's very interesting I'm looking forward to seeing how that plays out with the different countries and who are the laggards and who are the innovators so we'll see how that goes and you mentioned earlier about May first being a deadline for Japan I read that that also affects the crypto asset derivatives market and the derivatives are they can blitt play a big part

12:41obviously not as large as the stock market derivatives market which is gigantic but how is that going to affect more than just you know Bitcoin and your regular cryptocurrencies so I guess the first thing to note in Japan is that actually 80% of volume in Japan comes is estimated to come from derivatives trading so it is you know a gigantic so to speak part of that market so there

13:05are changes that are going to affect a significant chunk of the market the first thing is that the trader type is going to be classified so it will differentiate between margin traders versus token issuers and that's in order to encourage I feel is a fundraising tool and not I see OHS but really kind of drill down on the margin traders if an exchange

13:28wants to offer leverage this is the big this is the killer if the exchange wants to offer leverage they have to register it's fine they've got 18 months to do that and that's a different registration to the anti-money laundering registration but 18 months allows the existing exchanges to come in line over time the leverage though the cat there is going to be a cap on leverage and you

13:49know we've we've seen exchanges offer as much as this insane number of 300 times leverage more common is a hundred times yet more common 25 times the average according to the jig ECA last year I think was 11 times now that cap on leverage is gonna be two to four times now that seems like a drastic change but if you compare it to let's say the US a

14:17US qualified retail investor who wants to trade derivatives in traditional markets is captive three times leverage so and with the ability to get margin called and reduced at any time at cetera et cetera so it's aligning itself with derivatives trading in traditional markets what's more interesting actually is that it aligns that that leverage number it aligns itself with the FX

14:40industry in Japan and so that's actually a very positive strong signal that you know Japan could over time be setting the stage to edge towards crypto becoming illegal tender hmm well that sounds like a great step towards that so if that's the case then you know be great to look forward to seeing that regulation in Japan so that's all the time that we have for the interview alsa

15:07but it sounds like coolbut is working with a lot of different exchanges moving forward if there are viewers that are looking to learn more information what's the best way for them actually last year unfortunately are you there yep yep what's the best way for I didn't hear your last question no problem I was just asking what is the best way for viewers to learn more about cool bit

15:29follow along with the updates they're making and these regulations that you're working with you can find us on all the social media channels or on coolbut XCOM