By Jack Lee, Ryan Chan, Heather Leung, Victor Leung (HKUST) and Ritu Joseph (London Business School)
Photo: Kanchanara (Unsplash)
Overview of the deal
Acquirer: Binance
Target: Sakura Exchange Bitcoin
Closed date: 30 Nov 2022
Cryptocurrency giant Binance has returned to Japan through its acquisition of Sakura Exchange Bitcoin (SEBC), one of 31 Crypto-Asset Exchange Service Providers (CAESPs) registered in Japan. The acquisition marks Binance’s fourth investment in November amidst the bearish landscape, consolidating its dominance as the most licensed and largest cryptocurrency exchange (by volume) globally.
Having previously exited Japan after being reprimanded for operating without regulatory approval, Binance’s re-entry, this time as a JFSA-regulated entity, highlights the growing strategic value held by Japan’s digital asset ecosystem under Prime Minister Fumio Kishida’s “New Capitalism” - a stark contrast to the reservation displayed by other East Asian policymakers, Singapore and China in particular. Indeed, Binance’s “renewed interest” in Japan has been attributed to the country’s relaxing digital asset regulations, which also induced the acquisition of DeCurret (another Japanese CAESP) by Temasek-backed crypto unicorn Amber Group earlier in February.
Terms of the deal remain undisclosed.
“The Japanese market will play a key role in the future of cryptocurrency adoption. As one of the world’s leading economies with a highly-developed tech ecosystem, it’s already poised for strong blockchain uptake. We will actively work with regulators to develop our combined exchange in a compliant way for local users. We are eager to help Japan take a leading role in crypto.” - Takeshi Chino, General Manager (Binance Japan)
Company Details (Acquirer - Binance)
Founded in 2017 by Changpeng Zhao, Binance is the largest cryptocurrency exchange in terms of daily trading volume. With a wide variety of crypto derivatives as well as hundreds of cryptocurrencies, including BNB, BTC, ETH, etc. offered for trading, Binance is designed as a platform for more experienced cryptocurrency investors. Moreover, Binance has the lowest fees in the industry, allowing investors to retain more of their earnings. However, Binance has been facing investigations and regulatory issues, making part of its services unavailable in some countries, like the US.
Founded in 2017, headquartered in the Cayman Islands
CEO: Changpeng Zhao
Number of employees: 6,440
Market Cap: N/A (privately held)
Revenue: ~$20bn (Oct 2021 - Oct 2022)
Company Details (Target - Sakura)
Sakura Exchange BitCoin is a Japanese crypto operator that offers trading of the Japanese Yen against 11 digital assets, including BTC, ETH, LTC and ADA. Sakura is regulated by the Japanese Financial Services Agency (FSA) and through this acquisition, Binance will be able to solidify its expansion into Asia. The terms and valuation of the deal were undisclosed, and the value gained from this transaction is yet to be quantified. The company also offers free consultation services for users looking to trade in crypto and aspires to work in tandem with regulators in order to create a better user experience. Japan is now the 12th country where Binance has sanctioned its operations. Binance has previously tried to enter the Japanese market but failed to acquire the necessary licences to operate.
Founded in 2017, headquartered in Osaka, Japan
CEO: Satoshi Tsuki
Market Cap: N/A (privately held)
Projections and Assumptions
Short-term consequences
After the announcement of the acquisition, the price of Binance’s native coin BNB did not react significantly to the news. Nonetheless, the acquisition marks the milestone of Binance getting its first East Asia licence and a step forward in its continued efforts to achieving global compliance, further reinforcing Binance’s leading position in the cryptocurrency exchange industry. Before the acquisition, Binance had encountered years of regulatory opposition in Japan, having received warnings from the FSA for conducting unauthorised trades in the country in 2018 and 2021. Yet, Binance Japan’s general manager Takeshi Chino has pledged to work with regulators to avoid regulatory issues again. Sakura also reassured investors that there will be no changes to the segregation method of customer assets.
With a significantly larger number of trading pairs offered by Binance (1,424 pairs) compared to that of Sakura Exchange (11 pairs), Japanese crypto enthusiasts can enjoy more crypto trading choices and opportunities.
Long-term Impacts
This acquisition happened at a time when the swift collapse of one of the world’s largest cryptocurrency exchanges, FTX, shocked the entire crypto industry and the world. The unravelling of the complete lack of corporate control of FTX has destroyed trust in cryptocurrency. Also, Binance itself has been the centre of money-laundering investigations recently. There have been concerns that Binance may become the next FTX and that the crypto industry may not survive. Yet, Binance’s march into Japan, a country with strict crypto regulations, gives out a positive signal that Binance, and the whole crypto industry will still go on and even expand amid the “crypto winter”, reducing crypto investors’ panic to a certain extent. Also, Binance’s willingness to cooperate with strict Japanese regulators signals the start of a change for the largely-unregulated crypto industry to embrace more regulations.
Moreover, Binance’s strong compliance system, wide variety of crypto derivatives, and well-developed user protection policy will pave the way for Japan to become a mature crypto centre in the future. Being the third largest economy in the world and a technology powerhouse, Japan undoubtedly has huge potential and Binance’s entrance into the Japanese market aligns with the government’s ambition to expand its Web3 environment.
In the previous fiscal year, FY2021 the trading value of Japanese crypto assets amounted to 65.7 trillion Japanese Yen. The largest market participants are thirty year olds and the popularity of this market is growing steadily across other age groups. In the medium-term, transaction volume is likely to grow due to positive regulatory developments. Over this year, (FY2022) Japan has taken steps to reinvent the cryptocurrency market within Japan. Japan’s Virtual Currency Exchange Association’s (JVCEA) measure includes: i) tokens being listed within 30 days of reporting their coins assessments; ii) ‘Greenlists’ wherein some tokens will qualify for faster listings; iii) restrictions and tighter protocols for any inappropriate tokens. The regulatory relaxations imposed by the government will also allow crypto startups to compete with existing players. Prime Minister Fumio Kishida has supported the reinvigorating of the crypto sector in Japan and has also publicly supported the development of Web3 services.
Over the last month, Bitcoin has already gained 2% despite Japan’s equity benchmark dropping by 3%. Ethereum also rose by 3.2% on December 20, 2022, despite stocks falling as the Bank of Japan allowed benchmark bond yields to rise.
Risks and Uncertainties
The long term prospects of cryptocurrency in Japan do not look as promising. A large percentage of current investors are 30 year old investors, and this demographic has historically been shrinking in Japan. Competition among small scale players will also be hindered due to Binance’s control over the crypto market. In order for the cryptocurrency market in Japan to improve, the scepticism associated with this sector must change and long-term regulatory reform in support of crypto is required.
Being a small-scaled crypto exchange in Japan with only 11 trading pairs, in essence, what Sakura Exchange BitCoin can offer to Binance is only its status of being a regulated crypto exchange in Japan. Undoubtedly, JFSA also knows this. It is then under question if Binance can receive the permit to return to the Japanese market 4 years after it pulled out of the region, given it is crudely taking advantage of the loophole, which is supposedly against the intention of the Japanese authority. There is a significant risk that Binance might not be able to achieve its strategic goal behind the deal with subsequent pressure from regulators.
Various officials at Binance have expressed willingness to take on restrictions in order to improve investor sentiment. Takeshi Chino, the general manager of Binance Japan said, “We are eager to help Japan take a leading role in the crypto industry.” Binance CEO, Chengpeng Zhao also expressed interest in establishing an industry recovery fund to mitigate the damage caused by FTX’s recent collapse. This fund would also pave the way for similar deals, which would allow Binance to gain stronger footholds across different countries.
“On top of our effort to prioritise user protection, Binance’s strong compliance system will contribute to building a more compliant atmosphere for users in Japan and help them access key crypto services needed for mass adoption in the future.” - Hitomi Yamamoto, CEO (SEBC)