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bitFlyer, a major Japanese cryptocurrency exchange, has announced the acquisition of FTX Japan, the Japanese subsidiary of the bankrupt FTX Trading. bitFlyer Holdings has acquired 100% of FTX Japan's shares, and FTX Japan will become a wholly owned subsidiary of bitFlyer.
In November 2023, reports emerged that FTX's financial soundness was questionable, causing customers to panic and even run on the bank. The company tried to calm down, but in just over 10 days, its cash flow collapsed and it went bankrupt. Its total debt is estimated to be 1.4 trillion yen to as much as 7 trillion yen in Japanese yen, and due to its large scale, it is expected that discussions on regulating the entire cryptocurrency industry will accelerate in the US Congress in the future.
Naturally, since FTX Japan is also the subject of a lawsuit in the US Bankruptcy Court, the procedure for making it a wholly owned subsidiary will require approval from the US Bankruptcy Court. Although details have not been disclosed, the acquisition price of bitFlyer is reported to be in the billions of yen. Why did bitFlyer acquire a company in such a precarious state? Regarding this matter, Yuzo Kano, CEO of bitFlyer Holdings, stated the following on the official X website:
"I believe that in the near future, institutional investors in Japan will incorporate crypto assets into their portfolios. bitFlyer plans to develop the crypto custody business as a new core business, leveraging the strong security that has been our strength since our founding. Please look forward to the new services that only our company can provide."
The main topic here is the custody business for institutional investors, and bitFlyer has invested several billion yen in this upfront investment.
In the cryptocurrency industry, a company that performs custody business is called a custodian. As I mentioned earlier, custodians will become a new collection device for the cryptocurrency industry in the future. In this article, I would like to explain why institutional investors are investing so much money in custodians.
● Holds users' wallets and private keys
● Acts as an agent for buying and selling crypto assets
● Under the supervision of the Financial Services Agency in Japan
The main task of a custodian is to store and manage the "private keys" of users. Usually, when we touch crypto assets, we do not show the wallet data containing the private key to anyone, nor do we entrust it to anyone. This is because we know how serious a problem it would be if the private key in the blockchain were to be leaked to a third party.
In reality, when crypto assets are leaked, most of them are not caused by the blockchain encryption being decrypted, but by the private key being leaked in some way.
The existence of a private key is literally a key part in ensuring the safety of crypto assets, but for institutional investors who manage crypto assets by accepting funds from third parties, having a private key can be the biggest risk in the safe management of assets. That is why institutional investors want to entrust the storage and management of private keys to custodians, who are experts.
Under Japan's revised Payment Services Act, even companies that only perform custody services and do not buy, sell, or exchange crypto assets themselves are required to fulfill various obligations under the supervision of the Financial Services Agency. It is operated under stricter standards than custodians in other countries, and institutional investors can rest assured that they can entrust their private keys to it.
In Japan, cryptocurrency exchanges often perform custody services themselves. In this case, cryptocurrency can be purchased at the exchange and wallets can be deposited directly, which is very convenient. However, if the exchange goes bankrupt, there is a risk of losing assets, as in the case of FTX trading.
This is thought to be the reason why bitFlyer decided to acquire FTX Japan and have it focus on custody services. Institutional investors do not need to manage their own private keys or wallets, and there is no risk of losing funds in the event of bankruptcy, as with custody by cryptocurrency exchanges. It is expected that "custody services by third-party institutions" will become established as a form of cryptocurrency custodian in Japan.
・FTX Japan will focus on custody services in the future
・Japanese custodians are highly credible because they are under the supervision of the Financial Services Agency
・Custody services will become a trend in the Japanese cryptocurrency industry in the future
Glossary
bitFlyer: A Japanese cryptocurrency exchange operated by bitFlyer Inc. It is also the lead company of the Japan Blockchain Association, a general incorporated association
FTX Trading: An exchange that suffered the largest business bankruptcy in the cryptocurrency industry on November 11, 2022. Its sloppy management has come to light and it will be facing numerous lawsuits in the future
FTX Japan: It was formerly known as Quoine, the first exchange to be registered as a cryptocurrency exchange business by the Financial Services Agency (Kanto Regional Financial Bureau) in September 2017. It was acquired by FTX Trading in 2022 and took on its current name. Currently, following the bankruptcy of FTX Trading, it is carrying out asset return operations to customers
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