May 24, 2017 1:22 PM

Why Japan, the World’s Third Largest Bitcoin Market, Sees $300 Premiums

Japan and South Korea, the third and fourth largest bitcoin exchange markets, have seen premium prices ever since the launch of local bitcoin exchanges and markets. Analysts suggest that such arbitrage opportunities exist in Asia’s largest bitcoin exchange markets due to the two countries’ strict Anti-Money Laundering (AML) policies.

Ever since the launch of major bitcoin exchange backed by some of the country’s largest multi-billion dollar conglomerates, the South Korean bitcoin exchange market has demonstrated a premium rate of around 15 percent in comparison to other major markets such as the US and China. Due to its extreme premium rates, which currently range from 20 to 25 percent, the bitcoin investment community has focused on unraveling reasons behind the large arbitrage opportunity in South Korea, rather than evaluating the premium rate in the Japanese exchange market.

Although Japan is currently the third-largest bitcoin exchange market behind the US and China, for over a year until last week, it had secured its position as the largest bitcoin exchange market in the world with a staggering 40 percent market share.

The only possible explanation of the Japanese bitcoin exchange market’s sharp 25 percent fall in trading volume and market share is the strong comeback of the Chinese bitcoin exchange market. Analysts have suggested that Chinese investors were temporarily trading bitcoin in the Japanese bitcoin exchange market due to the suspension of withdrawals placed on local bitcoin exchanges by Chinese regulators.

Considering that Japan was the world’s largest bitcoin exchange market for over 12 months and processed 40 percent of global bitcoin trading, it is important to understand the reason behind the existence of premium rates on local Japanese bitcoin exchanges.

According to bitcoin trader and Adamant Research editor in chief Tuur Demeester, executives of South Korean bitcoin exchanges including the chief information of the country’s second largest exchange Korbit have attributed the premium rates to the implementation of strict Anti-Money Laundering policies.

Despite being the largest bitcoin exchange market in the world for some time, Japan’s AML policies and systems prevented traders from taking advantage of the arbitrage opportunity without being flagged by regulated exchanges and authorities.

Strict AML policies exist in Japan due to the request of the Financial Action Task Force (FATF) in 2014 to the federal government of the country to enact proper AML systems. The FATF warned the Japanese government that the failure to integrate appropriate AML policies could lead Japan to FATF’s gray list which entails countries with deficiencies in tackling money laundering.

“If the Japanese Government did not respond to this call then the country faced the possibility of being listed in FATF’s gray list along with other countries (including Afghanistan and Iraq) that are considered to either have strategic deficiencies in tackling money laundering or counter terrorist financing, or that have not made sufficient progress in addressing these deficiencies,” read Norton Rose Fulbright’s analysis in 2014.

Since then, Japan has focused on introducing strict AML policies to avoid potential conflicts with FATF and global counter-terrorism regulations, tightening capital controls.

Featured image from Shutterstock.

Last modified: May 21, 2020 9:47 AM

Joseph Young @iamjosephyoung

Financial analyst based in Seoul, South Korea. Contributing regularly to CCN and Forbes. I have covered the stock market and bitcoin since 2013.