Japan FinTech Observer #81

Welcome to the eighty-first edition of the Japan FinTech Observer.

The two items to highlight this week are somewhat contradictory. We start with the good news. Based on its third progress report on the Financial Action Task Force's (FATF's) Fourth Mutual Evaluation, published in 2021, Japan has managed to eliminate all "partially compliant" ratings. This is significant, since the combined force of the Financial Services Agency (FSA) and Bank of Japan (BOJ) was put behind a concerted effort to raise the AML and CTF standards across the industry prior to the inspection, only to disappointingly receive ten "partially compliant" and one "non-compliant" mark.

Now that we have confirmed our status as a law-abiding nation, let me ask you this: for how long will you be able to operate a non-compliant money transmitter business in Japan? Shockingly, it took close to three and a half years for the FSA to shut down EcoRemit, during which time the company executed approximately 270 remittances of over 1 million yen each, for which it was not licensed, in addition to having no Compliance and Internal Audit departments to speak of. Three years seems an awfully long time to make improvements that are considered foundational to the conduct of the business.

Elsewhere, here is what we are going to cover this week:

• Venture Capital & Private Markets: Global Brain and Sony Financial Ventures have jointly established their second CVC fund; G.U. Group has raised 150 million yen through convertible corporate bonds with token conversion rights from Aozora Bank; Helicap Group announced a USD 3m investment by GMO Payment Gateway in its flagship credit fund
• Banking: SMBC Bank International has officially commenced operations as a universal bank in the UK; the FSA has put into force the first "Guidelines on Cybersecurity in the Financial Sector"
• Payments: G.U. Group and Aozora Bank consider issuing a specific trust beneficiary rights-type stablecoin; JCB has enabled Google Pay for its customers in Japan; the FSA has shut down money transmitter EcoRemit; after the latest progress report, the FATF has re-rated Japan, with no partially compliant criteria remaining
• Capital Markets: Nomura has been suspended as a Primary Dealer for a month; enechain has upgraded its marketplace for wholesale electricity trading; Berkshire Hathaway has raised 281.8 billion yen ($1.9 billion) in a yen-denominated bond offer
• Asset Management: LY Corporation shuts down PayPay Asset Management
• Digital Assets: Hakuhodo has partnered with Tools for Humanity, a key company in the Worldcoin project; Crypto Garage has launched its blockchain backend service “mahola”; Monex updates on the De-SPAC transaction for Coincheck
• The Last Word: Sentiment

eXponential Finance Podcast

The latest episode of the eXponential Finance Podcast features our panel at the WebX conference held on August 28 & 29 in Tokyo, focusing on the intersection of Exchange-Traded Funds (ETFs) and digital assets, and exploring the evolving landscape of cryptocurrency investment products.

Katherine Dowling, General Counsel & Chief Compliance Officer at Bitwise Asset Management, and Henry Zhang, Founder & CEO at DigiFT, discuss the implications of crypto ETFs, the regulatory environment surrounding these products, and the broader impact on both traditional finance and the DeFi ecosystem.

They share insights on market trends, investor sentiment, and the potential future of tokenized securities and digital asset investment vehicles.

This episode is available on Apple Podcasts, YouTube, Amazon Music…and many other major platforms via our Spotify Podcaster page.

Venture Capital & Private Markets

• Global Brain and Sony Financial Ventures have jointly established “SFV･GB II L.P.” (SFV･GB II), as the successor fund to SFV･GB, also with a JPY 5 billion fund size; this will further accelerate their open innovation with startups, leveraging the broad knowledge of the financial businesses of Sony Financial Group; SFV･GB invested in 20 startups in Japan, Europe, North America, etc. in Fintech, Insurtech, healthcare, AI, mobility, and other fields
• G.U. Group has successfully raised 150 million yen through convertible corporate bonds with token conversion rights from Aozora HYBRID3 Investment Business Limited Partnership, marking the first such bond issuance in Japan; the funding comes together with a business alliance agreement to issue stablecoins (see "Payments")
• Helicap Group announced that GMO Payment Gateway, a leading provider of payment and financial-related services under the GMO Internet Group, has made a USD 3 million investment in Helicap’s flagship credit fund managed by Helicap Investments, a regulated subsidiary of the Helicap Group

Outside FinTech (Japan Startup Observer)

• Daiwa Corporate Investment, JAFCO, Mitsubishi UFJ Capital., Japan Investment Corporation, Global Brain, and others participate in Rege Nephro USD 15m Series B first close; Rege Nephro is a clinical-stage biotech company utilizing induced pluripotent stem cell (iPSC)-based technology from the Center for iPS Cell Research and Application (CiRA), Kyoto University; it is developing therapeutics and cell therapy for kidney, liver, and pancreas diseases
• Ciconia Bioventures has announced its establishment as a joint venture company based on a master agreement signed on April 22, 2024 by Takeda Pharmaceutical, Astellas Pharma, and Sumitomo Mitsui Banking Corporation; Ciconia seamlessly covers the entire process from early drug discovery research to establishment of biotech startups, with the aim of translating innovative technologies and drug discovery programs originating in Japan into clinical applications
• Alpha Fusion has raised a total of ¥1.02 billion through a Series B funding round, led by SBI Investment and OSAKA University Venture Capital, with participation from several new investors; this funding will enable Alpha Fusion to accelerate its research and development efforts, enhance its supply chain, and deliver Japan’s cutting-edge cancer therapies to the global market as quickly as possible

Banking

• Sumitomo Mitsui Financial Group, Sumitomo Mitsui Banking Corporation and SMBC Nikko Securities announced that SMBC Bank International, a commercial banking subsidiary in London, has successfully completed the transfer of the securities business from SMBC Nikko Capital Markets Limited; with the completion of this transfer, SMBC Bank International has officially commenced operations as a universal bank in the UK
• The Financial Services Agency published a draft revision to the “Comprehensive Supervision Guidelines for Major Banks, etc.” and a draft of the “Guidelines on Cybersecurity in the Financial Sector” from Friday, June 28, 2024 to Monday, July 29, 2024, and solicited comments from the public; the public dialog resulted in sixteen revised Supervisory Guidelines and the final publication of the Guidelines on Cybersecurity in the Financial Sector, all of which came into effect on October 4, 2024

Payments

• G.U. Group, a provider of Web3 solutions such as stablecoin issuance and management systems and blockchain infrastructure, has announced the signing of a basic agreement with Aozora Bank to consider issuing a specific trust beneficiary rights-type stablecoin utilizing trust functions
• JCB has enabled Google Pay for its customers; Android smartphone users can now use Google Pay in stores where JCB Contactless is accepted, by adding their credit/debit cards issued by the JCB Group in Japan to Google Pay; to use Google Pay, users will need to download the Google Wallet app and add their JCB Card; JCB plans to extend this support to other JCB brand card issuers both in Japan and other markets
• Money transmitter EcoRemit shut down: the Financial Services Agency, through the Kanto Financial Bureau, has issued a business suspension order for all operations related to the EcoRemit money transfer business from October 11, 2024 to April 10, 2025; given the past history detailed in the suspension order, it is unlikely that the business will get off the ground again
• Since the 2021 assessment of Japan's measures to tackle money laundering and terrorist financing and the 2022 and 2023 Follow-Ups, the country has taken a number of actions to strengthen its framework; in line with the FATF Procedures for mutual evaluations, the country has reported back to the FATF on the action it has taken since their mutual evaluation; consequently, to reflect Japan's progress, the FATF has now re-rated the country on 6 Recommendation; overall, Japan is now compliant on 4 Recommendations and largely compliant on 35; the country has no Recommendations rated partially compliant

Capital Markets

• The Tokyo Stock Exchange Carbon Credit Market celebrated its first anniversary; since the opening of the market, the market has continued to grow steadily in terms of both the numbers of market participants and trading volume, with 297 participants registered as of October 10, 2024 and a cumulative trading volume of 521,704t-CO2 (daily average of 2,129t-CO2); the Carbon Credit Market was launched with trading for J-Credits; after the market was launched, TSE revised the trading categories and introduced a market-maker scheme in order to improve liquidity in the market
• The Financial Markets Department of the Bank of Japan has been conducting the “Tokyo Money Market Survey” since 2008 to grasp the trading trends of Japan’s short-term money market; this survey was initially conducted every two years, but in order to follow market trends more accurately, it has been conducted annually since 2013, and the 15th survey was conducted in August this year (the survey base point was the end of July this year); as in previous surveys, this survey targets targeting parties involved in the Bank’s operations and major participants in the short-term money market
• Following a recommendation issued on September 25, 2024, by Japan's Securities and Exchange Surveillance Commission to impose an administrative monetary penalty against Nomura Securities for Japanese government bond futures transactions conducted in March 2021, the Ministry of Finance has now announced the suspension of Nomura Securities’ Special Entitlements of JGB Market Special Participants (Primary Dealer) from October 15, 2024 to November 14, 2024
• enechain has launched “eSquare Live,” a significantly upgraded online marketplace for wholesale electricity trading where power generators, electricity retailers, and traders can trade various products in real-time, from spot to futures markets; it introduces the first algorithm in Japan capable of instant execution for wholesale electricity hedge trading, representing a major evolution from the traditional eSquare platform
• Warren Buffett's Berkshire Hathaway has raised 281.8 billion yen ($1.9 billion) in a yen-denominated bond offer, a move analysts say lays the ground for the U.S investment company to increase its exposure to Japanese assets; the deal was the largest bond sale in the Japanese currency for the firm in five years

Asset Management

• LY Corporation shuts down PayPay Asset Management: Z Financial Corporation (ZF), Asset Management One (AM-One), and PayPay Asset Management (PPAM) have announced that PPAM plans to terminate its business operations by the end of September 2025

Digital Assets

• Hakuhodo has partnered with Tools for Humanity, a key company in the Worldcoin project, an effort to create the tools humans need to prepare for the evolution of AI; co-invented by Sam Altman, Alex Brania, and Max Novenstern, the project aims to improve online trust by distinguishing humans and AI with a World ID, and to build a global economic ecosystem in which only humans can receive currency and services; Tools For Humanity, a company co-founded by Alex Brania and Sam Altman, is promoting the project
• Crypto Garage, a leading provider of blockchain financial services in the FinTech field, has officially launched its blockchain backend service “mahola”, leveraging Amazon Web Services (AWS) to remove various obstacles companies faced when constructing a web3 business; based on the concept of “Simplifying your web3 business,” Crypto Garage streamlines the development of web3 services seamlessly, just like conventional Web2 technology; any web3 services can be developed without its obstacles, such as nodes and IPFS, which do not exist in the Web2 space; developing a wallet, distributing NFTs, and managing private keys is also simple
• Coincheck Group (CCG), a consolidated subsidiary of Monex Group, which will be a holding company of Coincheck, is working closely with Thunder Bridge Capital Partners IV, Inc. (THCP), a special purpose acquisition company (SPAC) publicly listed on the Nasdaq Global Market, to complete the previously announced merger which will result in CCG becoming a publicly listed company on Nasdaq pursuant to the Business Combination Agreement, dated March 22, 2022 and previously amended May 31, 2023 and May 28, 2024, among CCG and certain of its affiliates and THCP; the parties announced they have eliminated certain earn out provisions from the Business Combination Agreement

The Last Word: Sentiment

The Bank of Japan has published the results of the "99th Opinion Survey on the General Public's Views and Behavior", conducted in September. Here are some of the highlights.

In short: more than half of the survey respondents feel the economic conditions are worse than a year ago, one third believe the economic conditions will be worse one year from now, more than half say their household has become worse off over the past year, and almost two thirds judge that prices have gone up significantly.

These data points seem relatively far removed from a "Virtuous Cycle between Wages and Prices" that the Bank of Japan is aiming for.

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