A 25-year-old Japanese man was sentenced to three years in prison last Friday for creating crypto-extorting ransomware using generative AI.

Last year, Ryuki Hayashi created code capable of targeting and encrypting data from other devices and issuing crypto ransoms. He was able to do this by repeatedly rephrasing his prompts so that he could bypass generative AI safety parameters. 

Hayashi, who was reportedly unemployed at the time, told Kyodo News that he created the ransomware code in under six hours.

Read more: Did ‘AI’ Truth Terminal just pump and dump a coin named $RUSSELL?

When arrested this year by Japan’s Metropolitan Police Department, Hayashi admitted, “I wanted to make money through ransomware. I thought I could do anything if I asked AI.”

His conviction for abusing generative AI is reportedly a legal first for Japan. During his sentencing, the judge described Hayashi’s motives as “selfish” and left “no room for leniency.”

Hayashi also impersonated other individuals to purchase SIM cards as part of his “dark part-time work.” 

The judge suspended his prison sentence for four years, explaining that Hayashi had shown remorse and had come clean about his crimes. As a result, Hayashi will not physically enter prison unless he commits a crime within this four-year period. 

It’s also worth noting that the ransomware code he created was reportedly never used.

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Amid Japan’s FX and carry trade crisis last weekend, crypto had one of its worst weekends in history. From US markets’ close on Friday to their opening on Monday, bitcoin lost one-fifth of its value. Other crypto assets fared far worse.

Ether, for example, lost one-quarter of its value over the past week.

Other large altcoins mirrored ether with Solana (SOL), Avalanche (AVAX), Polkadot (DOT), Optimism (OP), Aptos (APT), Sui (SUI), Uniswap (UNI), and Filecoin (FIL) all losing approximately one-quarter of their market capitalizations.

Even MicroStrategy briefly dipped by nearly -30%.

Crypto meme coins are this week’s worst performers

Moving down the credibility leaderboard, meme coins ranked among the worst performers during the recent downturn. In the past seven days, Pepe has declined 33%, DogWifHat is down 40%, MAGA lost 43%, and Floki lost 30%. Even the largest meme coin, Dogecoin, shed 24%.

Overall, the global crypto market capitalization has lost $425 billion since last week. Its 17% decline far underperforms broad stock indices, indicating its relative weakness as investors fled crypto into safe havens. 

Read more: Supreme Court will hear Coinbase’s Dogecoin sweepstakes case

Since five business days ago, the S&P 500 is only -5%, Euro STOXX 50 is -6%, FTSE 100 is -3.4%, and Hang Seng is -2%. Crypto underperformed all of these indices by an embarrassing margin.

Crypto at -17% even underperformed the instigator of the weekend’s market crash: the Japanese yen’s -5% and the Japanese stock market’s -12%.

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In the early 2000s, before the creation of Bitcoin, a mommy blogger-type community of Japanese housewives met via the internet and helped one another master a skill that would set them up to become some of bitcoin’s earliest and most successful traders.

It is not a coincidence that Mt. Gox, Bitflyer, CoinCheck, Zaif, and Liquid (previously Quoinex and Qryptos) — crypto exchanges founded in Japan over a decade ago — once ranked among the most voluminous crypto exchanges.

Japanese conglomerates SBI and Rakuten also rank among crypto’s most prolific investors, funding some of the earliest rounds of Ripple, Bitcoin miners, and an assortment of crypto’s oldest companies.

Japan’s Mrs. Jones

Most people have never heard of ‘Mrs. Watanabe’ — not a woman’s name but a nickname for a group of people. The term evokes a stereotypical Japanese housewife who has profitably traded foreign exchange (FX) while her husband works and can be likened to ‘Mrs. Jones,’ the stereotypical housewife living the American Dream.

Thousands of Mrs. Watanabes started trading FX in the early 2000s, attracted predominantly to the AUD/JPY carry trade. Generally speaking, carry trades are relatively low risk, yet this carry trade was particularly profitable for Japanese citizens during that time.

Uniquely enabled to borrow large quantities of Japanese yen (JPY) on household credit — and at artificially low interest rates thanks to historic interventions by Japan’s Ministry of Finance in bond markets at the time — Japanese housewives earned positive yields in foreign currencies like the Australian dollar (AUD) or New Zealand dollar (NZD).

Moreover, FX brokers offered famously generous margins to Mrs. Watanabe, unapologetically advertising margin requirements as low as 0.25%. This meant the Mrs. Watanabes of the early 2000s could carry trade up to $4 million worth of AUD/JPY with only $10,000 in their FX account.

Japanese housewives get rich

For years, FX accounts proliferated throughout middle-aged Japanese households, often registered in a man’s name but controlled by a woman. These women congregated online, joining chat groups, blogging, and sharing FX trading tips.

Feminists argue that women in Japan have a historic role in managing household finances — including their husbands’ personal accounts — and tend to estimate the power of Mrs. Watanabe as being quite significant. Of course, most FX and crypto accounts might actually be owned and controlled by men — certainly nowadays, when dual-income Japanese households have become normative.

After some of these women got rich carry trading, Mrs. Watanabe began to speculate in other FX markets. Some historians credit the influence of Mrs. Watanabe in the USD’s post-Iraq invasion decline, as well as with various periods of volatility in the Swiss franc.

Of course, as with most retail trading phenomena, a huge number of Japanese housewives ultimately lost money. According to an economic report submitted to the Central Bank of Australia, “As a group, Japanese retail margin account investors held large positions and thus made large losses when carry trade returns turned sharply negative during the [2008] financial crisis.”

Nevertheless, the tradition of women managing household finances in Japan had spillover effects into the early days of crypto trading.

Mrs. Watanabe starts trading crypto

Japan’s Mt. Gox reigned as the world’s largest bitcoin exchange for nearly four years while Japan’s Liquid hosted one of the largest ICOs of all time: Telegram’s $1.7 billion GRAM token.

The country’s Financial Services Agency is one of the leading regulators in crypto, spearheading the first investigation into a major exchange collapse (Mt. Gox in 2014) and becoming one of the first governments to set a policy of pre-approval for token listings.

Unlike most countries, Japanese crypto exchanges must gain approval from the government prior to listing any new tokens. Not only that, after the financial crisis of 2008, Japanese legislators passed a series of consumer protection laws that, among other things, limited the leverage and types of trades available to retail investors.

As of 2022, Mrs. Watanabe — whoever that is — still accounts for a disproportionate 28% of global retail FX trades, despite the country only transacting 7% in interbank FX spot transactions that same year. This disproportionate participation in FX trading continues at around the same rate today, according to the Bank of Japan.

Read more: Mt. Gox hasn’t sold any of its 140,000 bitcoin but it’s planning to

The disproportionate influence of Japan on crypto

Mrs. Watanabe continues to exert significant influence over crypto markets, but no one knows precisely how much money these traders control. However, if they’ve learned anything about cryptography or the principles of Bitcoin — privacy and peer-to-peer transactions, for example — many Japanese housewives could well rank among crypto’s wealthiest whales.

Unlike carry trades, however, in the world of crypto, Mrs. Watanabe has no structural advantage over other countries like she did when Japan’s Ministry of Finance subsidized yen borrow rates. She does, however, have years of additional experience trading digital financial products like FX on margin.

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Creditors of hacked crypto exchange Mt. Gox have been contacted by its trustee to confirm their account details, as the firm gears up to repay them, with at least two creditors reportedly receiving funds.

In an email sent to several creditors, Mt. Gox’s rehabilitation trustee has confirmed the existence of their accounts and indicated that repayments of bitcoin and bitcoin cash are anticipated.

“Please note that you may not be able to receive repayment in BTC/BCH if your account is disabled of frozen in the future,” the email warned.

Several creditors have shared their copy of the email on Reddit. It appears that Bitstamp users and several Kraken users have received the confirmation.

Read more: Who owns MtGox claims to billions of dollars in bitcoin?

One creditor in Poland and another in Japan report receiving their repayments. They say 80% of their claim was returned in US dollars via a bank transfer.

The first Mt. Gox creditor repayments began in December 2023, with several reportedly receiving their repayments twice. In September, the repayment deadline was extended by a year to October 2024. At the time, the Mt. Gox estate held 142,000 bitcoin (worth $5.5 billion at press time), 143,000 bitcoin cash ($32 million), and 69 billion Japanese yen ($466 million).

Mt. Gox was one of the first crypto exchanges. It once facilitated over 70% of all bitcoin trades before it collapsed in 2014. Around 24,000 creditors were affected and 850,000 bitcoin was lost.

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FTX Japan has confirmed that its customers will be able to withdraw funds from “an unspecified moment in February.”

In a post published this week, the company informed users that their assets will be made available via Liquid, a Japanese crypto exchange that was acquired by FTX in February 2022.

Senior officials at Japan’s Financial Services Agency speculated back in January that the collapsed exchange’s Japanese unit would make assets available this month, and that the delay in doing so was due to “technical issues.”

It also clarified that there was “no objection at all” to the withdrawal plan despite FTX’s Chapter 11 filing in the United States.

Read more: FTX bankruptcy: A complete failure, worse than Enron

Tighter regulations mean FTX Japan funds were safe

As reported by The Register, Japan is one of the few countries to have implemented robust and defined regulations around cryptocurrency and exchanges. It’s due to this regulatory oversight that FTX customers in the country are even in with a chance of seeing their funds again.

Crypto exchanges in the country must register with the FSA and prove that they are in line with all anti-money-laundering (AML) laws and keep customer and exchange assets separate.

FTX Japan was relatively well placed to survive its parent company’s dramatic implosion but isn’t completely immune.

According to an earlier court filing, the unit is being auctioned as part of the US bankruptcy process and more than 40 parties have registered their interest.

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Japan’s largest online broker is packing up its crypto mining operations in Russia due to uncertainty caused by the Ukraine-Russia war and ongoing crypto rut.

As reported by Bloomberg, SBI Holdings has announced this week that it will be moving out of the Siberia region famed for its abundant hydro power and cold temperatures suited for crypto mining.

A spokesperson told the outlet that SBI’s Siberia exit is due to the uncertainty caused by Russia’s invasion of Ukraine and the dwindling profits being made through crypto mining.   

The broker plans to sell off its mining hardware and abandon all mining operations, however, SBI hasn’t decided exactly when it will stop its mining in Siberia.  

While SBI is calling time on its Siberian operation, a spokesperson said that the broker will keep its Moscow-based banking unit operational. 

Read more: Russian crypto mining firm BitRiver takes a swing at US Treasury

SBI Holdings may also be feeling pressure from the United States. Last month, Japan’s financial regulators warned crypto firms to cut ties with Russia following international sanctions. 

• US diplomats asked the country to cease all Siberian crypto mining operations.
• 31 Japanese crypto exchanges were told to cut off services to Russian users. 
• Japan’s Financial Services Agency told crypto exchanges in March to watch for any transactions linked to sanctioned individuals.

Bloomberg reports that SBI’s crypto asset business reported pre-tax losses of 9.7 billion yen or $72 million by June 30, four months after the war began.

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Japanese crypto holders will soon be able to convert their assets into hard cash and withdraw it on the spot after it was announced that crypto ATMs would be returning to the country after a four-year hiatus.

As reported by local news outlet Mainichi Shimbun, once the terminals, created by Osaka-based crypto exchange Gaia, are up and running, users will be able to convert and withdraw bitcoin, ether, bitcoin cash, and litecoin using an app.

Over the next 12 months, Gaia has plans to install 50 of the machines (known locally as ‘BTMs’) in Osaka and the country’s capital Tokyo. This number will rise to 130 over the next three years.

To use the service, users need to register to get their hands on a special card. They then send their crypto to the machine using their phone and withdraw the funds in yen.

It’s hoped the terminals will make the process of withdrawing crypto funds quicker – it currently can take a few days for funds to move from an exchange to a bank account.

According to a Gaia press release, the new machines will operate with a number of anti-fraud measures built in.

These include a withdrawal limit per transaction of 10,000 yen (around $750), topping out at 300,000 yen per day, careful verification screening at the time of user registration, and close monitoring with cameras.

Regulatory chaos is threatening Japan’s crypto future

Even with the proposed security measures, this is a curious time for Japan to be giving the green light to crypto ATMs.

The country is currently undergoing something of a crisis where virtual currencies are concerned, unsure about how exactly they should be regulated.

As reported by the Financial Times, the country’s leading crypto regulator, the Japan Virtual Currency Exchange Association (JVCEA), has seen “a stand-off with regulators, corrosive infighting and a chronic lack of resources.”

These issues threaten not only the organization itself but Japan’s very status as a global crypto hub.

Read more: Japan central bank tells G7 to figure out how to regulate crypto — fast

Established in 2018, the JVCEA was intended to take the lead on crypto self-regulation in Japan. However, the country’s financial service agency has since criticized the way the organization does things, specifically highlighting the conduct witnessed in two JVCEA meetings last year.

According to FT, the JFSA became concerned about “delays to crucial anti-money laundering regulation” and the fact that during the meetings, it “was not clear what kind of deliberations the body was having, what the decision-making process was, why the situation was the way it was, and what the responsibility of the board members were.”

The FSA also highlighted a lack of communication between high-level JVCEA members, resulting in overall poor management.

JVCEA members have also criticized the organization, claiming that it’s not equipped to move quickly on issues such as defining new anti-money laundering (AML) measures. There are also concerns that, even if it did put these new rules in place, it would be difficult for exchanges to implement them due to them being “small operators” (via FT).

Finally, there are worries about the professional background of those making the decisions.

According to a source quoted by FT, “office staff mostly consisted of retired people from banks, brokerages and government departments rather than secondees from member companies,” (our emphasis).

This, they said, is why “no one there really understands blockchain and cryptocurrencies. The whole mess shows it is not a simple problem of governance. The FSA is very angry about the whole management.”

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Japan’s financial regulator has told crypto firms to end their Russian relationships in order to conform to international sanctions following pressure from the US.

US diplomats have called on Japan’s 31 locally licensed crypto exchanges to cut off services to Russian users. Citing persons familiar with the matter, Financial Times (FT) says that US diplomats also asked the country to cease its Siberian crypto mining operations.

In Siberia, the Irkutsk region is still attractive to crypto miners whose power-hungry machines fare well with the cold weather and a cheap supply of hydropower energy.

In March, following a change to the country’s law, Japan’s Financial Services Agency (FSA) told crypto exchanges to keep a close eye on transactions linked to people subject to sanctions.

Japan’s Foreign Exchange and Foreign Trade Act was adjusted to bring cryptocurrencies and other digital assets under the FSA’s jurisdiction. However, the regulator’s warning did not directly ask the exchanges to terminate any Russian accounts.

Instead, they should:

• Block transactions of crypto-assets if the recipient or sender is subject to or suspected of sanctions or is required to gain permission from the government beforehand.
• Report all transfers to the FSA and Ministry of Finance (MoF) if it discovers a sanction-breaking user.
• Increase monitoring to make discovering the above easier.

Sanction-breaking crypto traders found flouting the law “shall be punished by imprisonment with work for not more than three years or a fine of not more than one million yen ($7,350), or both; provided that three times the price of the subject matter of the violation exceeds one million yen ($7,350), a fine shall be not more than three times the price,” the government said.

Despite this, many exchanges and mining operations still run within the country through a complex network of subsidiaries, reports FT. However, crypto exchange DeCurret has ceased facilities for Russian users following the FSA’s notice.

Read more: Japan central bank tells G7 to figure out how to regulate crypto — fast

Japan has been working with the US to curb crypto tied to Russia

Pursuant to March’s announcement, Chief Cabinet Secretary Hirokazu Matsuno said that the new rules would “[enable] the government to apply the law to crypto-asset exchanges like banks and oblige them to scrutinise whether their clients are Russian sanction targets.”

In January, after a meeting at the White House, Prime Minister Fumio Kashida preempted aggression from Russia. The head of Japan recognized the “importance of close cooperation among the United States […] and the Republic of Korea in addressing common challenges,” according to a White House release.

The concerns were later reiterated at the G7, when Bank of Japan official Kazushige Kamiyama said that crypto regulation was a priority before it “upend[ed]” the global settlement system.

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A senior Bank of Japan (BOJ) official has warned G7 nations that the clock is ticking on a common framework to regulate cryptocurrencies, reports Reuters.

The BOJ official warned G7 policymakers to quicken efforts to curb risk of crypto-powered sanction evasion in light of the ongoing conflict in Ukraine.

Appropriate measures need to be put in place before cryptocurrencies “upend” the global settlement system, they claimed.

“By using stablecoins, it’s not very difficult to create an individual global settlement system,” Kazushige Kamiyama, head of the BOJ’s payment and settlement system department, told Reuters.

Kamiyama said the priority is to bring current rules up to speed with the rapidly evolving crypto industry. He added the G7 is “working together while sharing information on current developments.”

Indeed, Japan seems hellbent on regulating crypto in the face of Russian President Vladimir Putin’s invasion of Ukraine.

Earlier this week, Chief Cabinet Secretary Hirokazu Matsuno informed Japan’s government of new proposed amendments to the Foreign Exchange and Foreign Trade Act.

The amendments would force crypto exchanges in line with traditional banks in enforcing sanctions.

New G7 rules could affect Japan’s plans for a digital yen

Any new rules agreed by the G7 — particularly around money laundering or privacy — could have knock-on effects when it comes to Japan’s ambitions for its own central bank digital currency (CBDC).

The BOJ already has the new digital yen in the works. The project set to enter the next phase of development in April, so any new regulations may have to reflect incoming central bank-sponsored stablecoins.

However, any official launch date will likely depend on CBDC timelines of other central banks around the world.

Read more: [Japan wants crypto exchanges to block sanctioned Russians, like banks]

“Given how so many advanced nation central banks are moving collectively, dramatically and simultaneously on CBDC, it could cause big changes in the settlement system in the future,” Kamiyama told Reuters, our emphasis.

“Japan needs to make sure it’s not left behind.”

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Japan’s government is set to tighten its foreign exchange legislation to prevent Russia leveraging cryptocurrencies to evade sanctions, reports Reuters.

During a Monday press conference, Chief Cabinet Secretary Hirokazu Matsuno said proposed amendments to the Foreign Exchange and Foreign Trade Act will seek to keep sanction targets out of the crypto ecosystem.

“[The revision] presumably enables the government to apply the law to crypto asset exchanges like banks and oblige them to scrutinise whether their clients are Russian sanction targets,” said Saisuke Sakai, senior economist at Mizuho Research and Technologies (via Reuters).

The amended act is expected to be submitted to the current parliament session, which will end in June. A finance ministry official confirmed that discussions were ongoing but didn’t provide further information, according to Reuters.

Also on Monday, Prime Minister Fumio Kishida told the coalition parliament that Japan needed to be in lockstep with the West in applying sanctions on Russia as its Ukraine invasion moves into its second month.

Indeed, Japan joined the US in calling on crypto exchanges to block transactions to sanctioned Russian and Belarusian individuals following a G7 summit earlier this month.

The threat of three years’ jail or a $1 million fine now lingers over Japan’s 31 crypto exchanges should any process transactions to sanction targets.  

As Bloomberg notes, Kishida’s approval rating jumped six points to 61% as a result of swift asset freezes on more than 100 Russian individuals and entities.

In the US, crypto exchanges like Coinbase and Kraken have avoided imposing such a ban until the White House forces their hand.

Japan’s crypto sanctions don’t really threaten Russia

Russia has placed Japan on its list of “unfriendly nations” in response to its strict sanction policies.

Last week, Russian President Vladimir Putin demanded that unfriendly countries pay for gas in roubles in a bid to boost its struggling currency.

Japan accounted for around 7% of Russia’s natural gas exports in 2021.

“Currently, we’re looking into the situation with relevant ministries as we don’t quite understand what is [Russia’s] intention and how they would do this,” finance minister Shunichi Suzuki told parliament (via Al Jazeera).

As for so-called “friendly countries” like Turkey and China, Putin said they could choose between either roubles their own currency.

Top energy official Pavel Zavalny also hinted that the country was open to remittance via Bitcoin, although the proposal appeared hypothetical rather than a concrete offer.

Read more: [Russia hypothetically accepts Bitcoin for oil and gas — if you’re its ‘friend’]

In any case, blockchain analytics firms Chainalisys and Elliptic have suggested that imposing crypto sanctions won’t deliver a meaningful blow to the finances of Putin supporters.

Elliptic claims to have identified hundreds of thousands of crypto addresses linked to sanctioned Russian officials and oligarchs.

While those wallets hold millions in cryptocurrency, the London-headquartered firm said the digital asset ecosystem lacks the liquidity to shoulder the weight of the Russian economy.

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