Providing new value based on bank guarantees and Mitsui & Co.'s creditworthiness Digital Asset Markets

I understand that your main business, including your future plans, is the UT (Utility Token) business, ST (Security Token) business, and DP (Data Protection) business. First, please tell us the details of the cryptocurrencies such as ZPG, ZPGAG, and ZPGPT, and the benefits to users.

Nishimoto Kazuya (hereinafter, Nishimoto): As a premise, I see UT, ST, and DP as the first stage up to 2030.

On top of that, I believe that our special crossing engine, which is based on the securities system technology of Intertrade, one of our largest shareholders, and our variable issuance token technology, which is optimal for real assets (RWA), give us the greatest advantages that other companies do not have.

DAMS' three main businesses are the first stage until 2030

Nishimoto: Our crossing engine has the major feature of being able to adjust liquidity regardless of the difference in scale when comparing small transactions of 1 yen by investors with large transactions in the huge London market accessed by issuers in the ZPG series.

In other words, it is a structure that enables centralized trading of 1 yen retail transactions up to large wholesale transactions, and while there are usually cases where slippage occurs in such processing, we have set slip loss to zero.

At the same time, wholesale transactions require a clearing function, and we have implemented processing based on the DVP (Delivery Versus Payment) concept.

In addition, with RWA tokens, if investor demand increases, a mechanism is required to theoretically increase the issuance amount infinitely as long as there are real assets, so the ZPG series adopts our RWA token issuance mechanism that makes this possible.

In addition to the structure that reduces the risk of outflow, the ZPG series is a commodity-backed stable coin, and since the issuance amount is variable, it supports multi-address processing with a smart contract as a measure to prevent issuance rights from being taken away.

This can be used to tokenize a variety of real assets, the issuance of which will become more active in the future, and inquiries are currently on the rise.

From the perspective of the DP business, crypto assets are a product based on an unprecedented concept in which the data itself has value (data owner = rights holder), so we recognize that platform providers handling crypto assets bear a great responsibility for data preservation.

To fulfill that responsibility, as part of our data preservation business, we have also independently developed "Digital Shelter," an unprecedented data preservation software with unprecedented strength.

What benefits does your UT business bring to users?

Tsuguo Kato (hereinafter, Kato): It is often mistaken, but the ZPG series is not a type of cryptocurrency that has underlying assets managed by trust. The ZPG series has a bank guarantee on the outstanding balance, which is the basis of its creditworthiness.

The issuer is a 100% subsidiary of Mitsui & Co. (Mitsui & Co. Digital Commodities (hereinafter, MDC)), so its creditworthiness alone is considerable, but the safety of the bank guarantee in the event of an unforeseen incident with the issuer is a major advantage in that users' assets are protected.

In addition, the actual value does not decrease due to trust-related expenses, and the price is always the same as the value of the target assets such as gold, silver, and platinum, without deviating from the value, making it a token with high price transparency.

Furthermore, at present, it can be held for a small amount of 100 yen, and technically it can be used for settlement in 1 yen units. There are plans to make it possible to trade on various chains in the future, so I think it can be said that it is an RWA token with asset properties and high reliability that can be held and transferred on the blockchain in the future.

Could you please elaborate a bit more on the fact that it is technically possible to use this card for payments in increments of 1 yen?

Nishimoto: At present, microtransactions starting from 1 yen cannot be realized because of issues with the tax system. In Japan, the "buying and selling" of crypto assets and "payments" are under the same tax system, so the tax system for investments is also applied to payments, reducing efficiency at the time of payment.

Stablecoins are originally intended to achieve price stability, but there are problems if they are subject to the same tax system as other highly volatile crypto assets.

There are also technical issues. When large amounts of money, in the hundreds of millions of yen, are moving, the current concept of a wallet will cause problems. In the future, when the advent of quantum computers makes it easier to carry out address attacks, a mechanism that acts as a safe called a treasury on a cross-chain will be necessary.

Is it difficult to solve this problem using CBDC?

Nishimoto: The biggest advantage of CBDC is that interest rates can be adjusted directly. Current market interest rates are passed through banks, but with CBDC, they can be manipulated directly. The reason we do not introduce CBDC is that it may make banks unnecessary.

On the other hand, the current situation where only stable coins are issued is half-baked, and considering the costs, we believe that issuing CBDC is inevitable. In order to circulate large amounts of funds, for example, technology is required to inflow and store them in a safe place such as a treasury.

In light of these current circumstances, we already have the technology to move funds directly and in a closed manner without using the All-Bank Net.

Kato: To add, in order to settle in units of 1 yen, not only are there technical issues arising from the current tax system, but the existence of retailers who accept them is also essential.

The proportion of digital swaps will increase in the future. We will work with as many commodity tokens as possible.

The design of your corporate website reflects energy sources such as oil and gas. Do you have plans to release any energy-related products in the future?

Kato: Yes, we are considering it with MDC, the issuer, although the timing is not yet decided. Possible tokens include crude oil, natural gas, electricity, and CO2 emission rights.

In the future, when the value of various things can be exchanged on the blockchain, I think the proportion of digital barter, or "digital swap," which does not involve "currency" as a means of payment, will increase.

In this world of digital swaps, material products that make up various products can become basic tokens and form the trading basis for digital swaps, so we would like to work on as many different commodity tokens as possible, not just energy tokens.

Nishimoto: We are targeting 2030 for energy tokenization.

I think there are two major factors that will play a role in this: the advancement of next-generation communication technology and the spread of quantum computers. First, 6G will evolve communication into a decentralized form, forming a new network where devices communicate directly with each other. This will expand the capacity and range of communication.

In current communication, addresses and contents must be clearly specified in P2P communication, but we have the technology to not put personal information on the blockchain. This is not a problem with cryptocurrencies, but in the case of security tokenization, personal information such as the names of shareholders will be required.

Even in such cases, privacy protection on-chain will be possible.

There are different interpretations of taxes for spot assets, ETFs, and crypto assets. In terms of the possibility of offsetting losses, it seems like the view is strict for crypto assets, but what perspective should users who purchase products such as ZPG take into account when holding them?

Kato: The reality is that, for securities investors, the choice of investment target is usually between stocks, bonds, investment trusts, or gold ETFs, while for cryptocurrency investors, the choice is between Bitcoin, Ethereum, or ZipangCoin.

In other words, it is actually a minority that first fixes on the option of gold and then thinks about the best investment method.

Before we talk about taxes, based on the way such investors think, I believe that for cryptocurrency investors, the significance of incorporating some of the safe assets with high asset value, such as gold, silver, and platinum, into their cryptocurrency portfolios will become increasingly important in the future.

Regarding the tax system related to cryptocurrencies, we often hear the idea that comprehensive taxation is unfavorable and separate taxation of securities is advantageous, but we recognize that the best option for a particular individual will vary greatly depending on factors such as the person's other income, the amount of profit from cryptocurrencies, and the necessary procedures such as filing tax returns. Therefore, we believe it is important to carefully communicate with investors so that they can accurately understand the tax system.

Nishimoto: Settlements based on the value of RWA as a crypto asset have the potential to grow as a new concept targeting non-financial areas, and we intend to respond by enabling crypto assets to be used as they were meant to be, based on a value-added perspective that differs from tax systems.

The risk of cryptoanalysis by quantum computers, which is expected to be implemented in a few years, cannot be ignored, and this poses particular risk to large-scale transactions.

For stable coins and the like, we would like to consider putting the concept of a treasury in relation to a wallet into practical use as a structure that allows everything to be processed on-chain, and linking the wallet and treasury as future responses.

If regulations and legal interpretations regarding cryptocurrencies are established with the aim of linking them to the prices of various commodities, what kind of amendments do you foresee?

Nishimoto: Rather than predicting it, it is our company's hope that legal regulations will be in line with those of developed countries in order to develop related businesses in Japan.

Also, in the world of digital swaps as mentioned above, there will be a large amount of exchange of various RWA tokens, so tax systems regarding capital gains on individual transactions may become an issue, and I would like to see regulations that are effective but do not hinder the development of digital swaps.

To be more specific, I think that the current investment tax system is fine for tokens with large price fluctuations, as they will mainly be bought and sold, but for tokens with less price fluctuations that are intended to be used for settlement (commodity-type stable coins, etc.), we would like to see a consumption tax system and legal regulations that promote digital swaps.

The essence of Web 3.0 is the concept of machines replacing the roles of business entities, which ultimately negates the business entities. On the other hand, the cryptographic distributed technology that is the core of openness can be used by business entities depending on how it is used.

The Security Token (ST) business that you plan to offer in the future seems to have many benefits for users, such as "smaller amounts, 24-hour trading, and instant cash conversion." What kinds of assets do you plan to digitize?

Kato: There is no big difference between crypto assets and security tokens (ST) in terms of technology, and the only difference is the implementation of differences in legal aspects (especially third-party requirements). Therefore, I think the direction of tokenizing various assets is the same, but I think whether crypto assets or ST will be used will depend on the characteristics of the asset.

At the moment, most STs are trust-type. There is also the issue of trust fees, so I think it is necessary for investors to choose to issue them as corporate bonds rather than trusts.

Investors will bear the risk of the issuer, but I think they will be able to purchase tokens based on the credit of the large company that is the issuer. In other words, I think it is important to increase the options for investors to base their trust on, such as the entrusted assets or the creditworthiness of the large company.

We also plan to provide a platform that can handle ST for real estate and accounts receivable in the future.

Nishimoto: I think the commodity tokens we are working on can be used for both crypto assets and ST. Real estate ST is the leading ST, but I think the scope will expand to infrastructure, accounts receivable, etc. in the future.

In that sense, we think there is a high possibility for small bond-related transactions, and our infrastructure has been built with the main focus on how to handle on-chain management of personal information, including the implementation of RTGS processing (real-time conversion).

I think that the limit for securities-related processing is T+0 (same-day settlement), but by realizing T processing (real-time settlement) with ST, we believe that direct finance, different from bank deposit accounts, can be realized.

In addition, while only the issuance market (primary) is currently leading the way in real estate ST, we believe that as various STs emerge, it is also important to develop a secondary market (secondary) that allows investors who initially purchased to sell back at any time, and our platform is capable of handling that.

The DP project is labelled as a "digital shelter" with the aim of protecting data from unpredictable threats. In particular, you said that it can also protect against threats from quantum computers, but how exactly is data protected?

Nishimoto: In an age where digital data itself has value, such as crypto assets, platform providers like ours recognize that they have a great responsibility to ensure that data is preserved. To fulfill that responsibility, we developed our own data preservation system, "Digital Shelter."

It is said that a 10,000-bit quantum computer is needed to analyze the current RSA encryption and the secret key, and it is not yet in practical use. It is estimated that it will take another 3 to 4 years, but we think that it is necessary to respond as soon as possible.

"Digital Shelter" is the world's first implementation of unprecedented encryption distribution technology, and by combining the characteristics of blockchain, we have been able to create a system that can reliably preserve data not only from current cyber attacks, but also from future quantum computer attacks and large-scale wide-area disasters.

Specifically, it has been recommended to replace it with PQC (quantum-resistant cryptography), which is resistant to quantum computer cryptanalysis, but our company has put into practical use multivariate polynomial cryptography, which is said to be one type of PQC. Multivariate polynomial cryptography has been proposed for a long time, but there are many issues, and we have not been able to confirm any cases where it has been put into practical use. However, we were able to put it into practical use by addressing those issues.

By combining this with an advanced password method (referred to as two-way consensus decryption), we have achieved extremely strong digital security, which we have named Digital Shelter.

The proof-of-concept experiment is almost complete, and a third-party evaluation has been obtained, so the system was already introduced to our company last year, and seven other companies have already decided to introduce it this year. We plan to continue expanding the system to various companies.

In addition, Digital Shelter makes the original data meaningless and stores it in a distributed manner, but even if the original data is encrypted and distributed, it is still considered to be the original data, making this a very difficult process to deal with.

This has the secondary effect of making it easier to store personal information overseas by turning it into a non-personal information form, and furthermore, it makes it possible to deal with this issue even with the blockchain, where the management of personal information is restricted. We have also obtained an opinion from a lawyer that this is legally acceptable.

These features not only make it possible to realize the aforementioned treasury-type large-volume transaction management and instantaneous securities clearing, but also enable a very wide range of business applications, including the overseas evacuation of domestic personal information, risk avoidance in the Nankai Trough earthquake, and data management other than KYC in ID-related open correspondence.

The essence of Web 3.0 is a concept that denies business entities as a result of machines replacing the roles of business entities, but we believe that the cryptographic distribution technology that is the core of openness can also be utilized by business entities depending on how it is used. DAMS has devised a service that allows business entities to approach the Web 3.0 field, and Digital Shelter is one of its core technologies.

Digital Asset Markets Co., Ltd.

Cryptocurrency exchange business Kanto Regional Financial Bureau No. 00024

Member association Japan Cryptocurrency Exchange Association

<Points to note when using crypto assets>

(1) Crypto assets are not Japanese currency (yen) or foreign currency (US dollar, euro, etc.).

(2) The value of crypto assets is not guaranteed by a specific country or person.

(3) Due to fluctuations in trading prices, the price of crypto assets may fall significantly below the purchase price, which may result in losses as a direct result of fluctuations in the value of crypto assets.

(4) Crypto assets may only be used to pay for goods and services with the consent of the person receiving payment.

(5) Crypto assets may become worthless due to the breakdown of the transfer mechanism or other reasons.

(6) The use or possession of crypto assets may be restricted in a country or region due to laws, regulations, or other regulations of that country or region.

<Important matters regarding cryptocurrency trading>

(1) Money

Managed separately from our own funds by entrusting money to Japan Securities Trust Bank Ltd.

(2) Crypto assets

Managed in a cold wallet that is not connected to external networks such as the Internet, in a state where each customer's shares can be identified on the data.

- Crypto assets are at risk of losing their value if a serious problem occurs in the transfer record system or if the crypto assets are lost due to a cyber attack, etc.

- If the private key of a crypto asset is lost, the crypto assets held cannot be transferred to a third party and may lose their value. In addition, if the private key is known to a third party, the crypto assets may be transferred regardless of the customer's intention, and the customer may suffer unforeseen losses.

- If the company loses crypto assets entrusted to us by customers due to theft or other reasons and is forced to compensate customers, our finances may collapse and we may not be able to compensate customers adequately.

- Due to disasters, communication failures on public lines, delays in recording processing in the system for recording the transfer of value of crypto assets, or other circumstances beyond our control, customers may not be able to trade (order execution, cancellation, etc.).

For details, please carefully read the "Cryptocurrency Transaction Terms and Conditions" and the "ZipangCoin (ZPG) Spot Trading Instructions" (document provided prior to contract conclusion), and make sure you fully understand the transaction content, mechanism, risks, etc., before trading at your own discretion.

Profile

Kazuya Nishimoto
CEO of Digital Asset Markets Inc.

CEO of Intertrade

Joined Nippon Kangyo Kakumaru Securities (now Mizuho Securities) and founded Intertrade in 1999. The company was listed on the Tokyo Stock Exchange Mothers in 2004, changed to the second section of the same market in 2015, and moved to the Standard Market in 2022. Founded Intertrade Coin (now Digital Asset Markets) in 2018. An expert in systems development who develops front-end systems for securities companies in-house.

Tsuguo Kato
Director of Digital Asset Markets, Inc. He joined Mitsui & Co., Inc. and served as CEO of Mitsui Bussan Commodities (USA) Inc. in the US, COO of Mitsui Bussan Commodities Ltd in the UK, General Manager of the Commodity Market Department at the Corporate Development Headquarters, Director of the Corporate Development Headquarters at the Headquarters, and President and Representative Director of Mitsui & Co. Digital Commodities before assuming his current position. He is an expert in global commodity trading.

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