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Bitcoin falls as exchange faces government warning in Japan

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Bitcoin fell after one of the world’s largest cryptocurrency exchanges was said to face a government warning in Japan, heightening concern that increased regulatory scrutiny will curb demand for digital assets.

Japan’s Financial Services Agency is planning to tell Binance, the trading venue founded by Zhao Changpeng, to stop operating in the country without a license, a person familiar with the matter said. Binance has several staff in Japan and has been expanding operations without receiving permission, the person said.

Bitcoin erased gains after Nikkei first reported the FSA’s plans, and the cryptocurrency was trading 2.2 percent lower at $8,700.85 as of 10:33 a.m. in London. Rival coins including Ether and Ripple also dropped.

Governments around the world have been stepping up scrutiny of cryptocurrencies in recent months amid worries that they’re facilitating everything from money laundering to tax evasion and fraud. Japan, one of the most active markets for digital assets globally, introduced a licensing system for virtual currency exchanges last year in an effort to improve oversight.

Binance told Bloomberg News in January that it was working to acquire a license in Japan. The exchange is “engaged in constructive dialogue” with the FSA and has “not received any mandates” from the regulator, Zhao said on Thursday.

To date, the Japanese regulator has issued licenses to 16 cryptocurrency exchanges, including bitFlyer Inc. and Quoine. Another 16 were given permission to operate without a license. Among those was Coincheck, which suffered a $500 million hack in January.

In the wake of the Coincheck theft, Japanese authorities have clamped down on the industry. Last month, the FSA issued an administrative penalty against Macau-based Blockchain Laboratory Ltd. for giving seminars and providing consultation services in Japan without a license. And this month, it suspended several local venues for poor security measures.

Separately, researchers, German researchers earlier this week said they had discovered unknown persons are using bitcoin’s blockchain to store and link to child abuse imagery, potentially putting the cryptocurrency in jeopardy.

The blockchain is the open-source, distributed ledger that records every bitcoin transaction, but can also store small bits of non-financial data. This data is typically notes about the trade of bitcoin, recording what it was for or other metadata. But it can also be used to store links and files.

Researchers from the RWTH Aachen University, Germany found that around 1,600 files were currently stored in bitcoin’s blockchain. Of the files least eight were of sexual content, including one thought to be an image of child abuse and two that contain 274 links to child abuse content, 142 of which link to dark web services.

“Our analysis shows that certain content, eg, illegal pornography, can render the mere possession of a blockchain illegal,” the researchers wrote . “Although court rulings do not yet exist, legislative texts from countries such as Germany, the UK, or the USA suggest that illegal content such as [child abuse imagery] can make the blockchain illegal to possess for all users.”

“This especially endangers the multi-billion dollar markets powering cryptocurrencies such as bitcoin.”

While the spending of bitcoin does not necessarily require a copy of the blockchain to facilitate, some processes, such as some mining techniques, require the downloading of the full blockchain or chunks of it. “Since all blockchain data is downloaded and persistently stored by users, they are liable for any objectionable content added to the blockchain by others. Consequently, it would be illegal to participate in a blockchain-based systems as soon as it contains illegal content,” the researchers wrote. Since mining is essential for the function of

bitcoin, as the process records the transactions into the blockchain to verify trades and generates new bitcoin in the process, having illegal content such a child abuse imagery within the blockchain could cause significant issues for the currency.

“We anticipate a high potential for illegal blockchain content to jeopardise blockchain-based systems such as bitcoin in the future,” the researchers wrote.

This is not the first time warnings over the ability to store non-financial data within the blockchain have been issued. Interpol sent out an alert in 2015 saying that “the design of the blockchain means there is the possibility of malware being injected and permanently hosted with no methods currently available to wipe this data”. The agency warned that the technology could be used in the “sharing of child sexual abuse images where the blockchain could become a safe haven for hosting such data”. But this is the first time such content has been shown to actually exist, creating a moral and legal quandary around possession and the blockchain. – Bloomberg, Guadian News Service

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