My Vision No.35
2018.4RegTech: The Dawn of a New
Direction for Regulation
The hack of the Bitcoin exchange CoinCheck in January 2018 and similar incidents demonstratethat the rapid advance of technological innovation necessitates the development of systems able
to respond instantaneously to rapidly changing financial conditions. Against this background,the term “RegTech” has recently come into being. RegTech is a portmanteau word formed from“regulation” and “technology.” But what precisely is RegTech? Will it offer effective solutions,and what effect will it have on society? This issue of My Vision offers a survey of expert opinion
on the subject.

About this Issue
Structural reform of regulation via RegTech – Business opportunities in a field without
clear leaders
Noriyuki Yanagawa
NIRA Executive Vice President, Professor of Graduate School of Economics, The University of Tokyo
Keywords…Regulators and the regulated, cost reduction, business opportunities, new market entries,
structural changes in the area of regulation, promising domains for innovation

Expert Opinions
Regtech: The Dawn of a New Direction for Regulation
What is RegTech?
What should Japan do to advance RegTech?

Open data and algorithmic regulation

RegTech can play a key role in theenhancement of compliance management

Tim O’Reilly

Masataka Hayakawa

Founder and CEO, O'Reilly Media Inc.
Keywords…Technology, algorithmic regulation,
realization of simple and effective regulation

Senior Partner, Atsumi & Sakai
Keywords…Contemporary corporate compliance,
corporate ethics, CSR, data sharing between
regulatory authorities and companies

A technological response to regulation for an
era of technological innovation

RegTech provides a background supporting
mechanism – Managers must promote
digitalization

Takamasa Sasaki

Hiroyuki Morikawa

President and CEO, AOS Legal Technologies, Inc.
Keywords…Innovation through technology, regulation
through technology, race against time, synergistic
effect with LegalTech

Professor, Graduate School of Engineering, The
University of Tokyo
Keywords…Low-cost and rigorous compliance withregulations, background support for safety andsecurity, fostering of BtoB ventures

Harnessing the enormous potential of
RegTechKenji Kushida
Japan Program Research Scholar, Walter H.
Shorenstein Asia-Pacific Research Center, Stanford
University
Keywords…Resolution of regulatory problems,
alternative mechanisms for what governments cannot
or will not provide, new private sector businesses

Interview period：January – February, 2018
Interviewer：Maiko Sakaki（NIRA Research Coordinator, Researcher）
Editor：Isao Arai
* Tim O’Reilly submitted his own manuscript.

This is a translation of a paper originally published in Japanese. NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul
Copyright Ⓒ 2018 by Nippon Institute for Research Advancement

My Vision No.35
2018.4
About this Issue

Structural Reform of Regulation via RegTech – Business
Opportunities in a Field without Clear Leaders
Appropriate Regulation using the Power of Technology will
also reduce Costs
In an era in which technological innovation has advanced sofar, it would be odd if the tide of innovation failed to reach theworld of regulation. While RegTech is not yet a familiar term, it
represents an innovation that brings regulation and technology
together, one which will change the orientation and themethodology of regulation through technological means. RegTech
Noriyuki Yanagawa
is a field that can have a significant impact in the future, and a
NIRA Executive Vice President,
field in which Japan has the potential to gain an international
Professor of Graduate School ofcompetitive advantage.
Economics,
The University of Tokyo
In order to do so, however, it will be necessary to possess asolid understanding of the trends in the field, and for the public
and private sectors to consider future responses together. In this issue of My Vision, a group of
specialists in the field discuss important points from a range of perspectives.
We tend to think of discussion of regulation as necessarily urging the relaxation of regulations.
In actual fact, however, we also have to consider the cost of implementing regulations. There is asignificant burden of cost for both the companies that are regulated and the authorities that
regulate. The regulated side is forced to retain evidence that it complied with regulations, and tocompile documentation to serve as proof of this. Meanwhile, the regulating side must invest timeand labor in processes such as conducting checks of this documentation and of the directorship ofcompanies.
These twin costs can actually be significantly reduced through the use of technology. This is one
aspect of RegTech.
Masataka Hayakawa, a Senior Partner in the law office Atsumi & Sakai, stresses that thechecks and monitoring conducted by companies to ensure thorough compliance with laws andregulations are highly compatible with technological approaches, and that the utilization of
RegTech can significantly reduce the cost and labor expended on compliance. At the same time,
Takamasa Sasaki, President and CEO of AOS Legal Technologies, Inc., points out that if theregulating and regulated sides do not both utilize new technologies, the cost of implementing
regulations will increase, and it will become difficult to adequately regulate companies that areusing sophisticated technologies.
Tim O’Reilly, the founder and CEO of O'Reilly Media Inc., indicates that the skillful use of newtechnologies can both reduce the amount of regulations and ensure more appropriate management,
and emphasizes the necessity for governments to also actively participate in the evolution of
RegTech with the goal of realizing simpler and more effective regulation.

Major Business Opportunities
However, discussion of reducing administrative costs through the use of technology does not
exhaust the subject of RegTech. It also presents private companies with major business opportunities,
This is a translation of a paper originally published in Japanese. NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul
Copyright Ⓒ 2018 by Nippon Institute for Research Advancement

My Vision No.35
2018.4and it possesses considerable potential to stimulate new market entries and corporate growth.
Taking the financial industry as an example, Professor Hiroyuki Morikawa of The Universityof Tokyo points out the high cost of responding to regulations for this industry, and stresses thepotential of the use of technology to considerably reduce these costs. At the same time, significant
business opportunities will be born for the companies supplying the technologies that will realize
these cost reductions, with the potential even for growth into global platforms.
Dr. Kenji Kushida of Stanford University argues that not only will RegTech reduce costs, but it
will also make possible new approaches to regulation that could not be realized using previous
technologies. He indicates that the exploitation of technological innovation has the potential toenable private companies to offer such new approaches to regulation, which will represent new
business opportunities for them. A major point in this is the fact that technological innovation has
dramatically increased the ability to collect and process data.

The Structure of Regulation will Change
Up to the present, it has been standard practice that administrative authorities such as national
and local governments represent the regulating side, while private companies are regulated.
However, RegTech will produce a significant change in this structure. It is possible that rather thanbeing the exclusive responsibility of the administrative authorities, regulation will be implemented
by the authorities and private companies in cooperation, or alternatively that the authorities will
provide the platform, but private companies will deal with implementation.
Considering this possibility, we can see that from this perspective also RegTech will offer private
enterprise major new business opportunities. Clearly, private companies have an advantage overadministrative authorities with regard to the development of reliable automatic processing programsand the collection and processing of data that will be useful to regulation. Some aspects of thisprocess should be left to private enterprise – development in the private sector will be essential to
the realization of technologies that will enable us to build mechanisms for entirely new forms ofregulation using data collected by the IoT and other information technologies.
As we see then, new business opportunities will be born, and we can expect that companies will
make active use of these opportunities through new market entries, which will expand the scale ofthe market.
However, it is of course the case that appropriate responses on the part of the administrative
authorities will also be an essential factor in enabling private companies to make more proactive useof technology and provide more sophisticated regulatory mechanisms. One necessary response will
be to appropriately determine such factors as the allocation of responsibility between the public andprivate sectors and the scope for sharing of information – efforts to create an environment that ismore encouraging of cooperation. This will no doubt also require a certain amount of reform of thelegal system.
In any event, this remains a field in which there are no clear leaders, and one which holds
significant opportunities for Japan. The diverse opinions of the experts collected in this edition of
My Vision make us keenly aware that both the public and private sectors are promising domains
for innovation in the era of RegTech.

Professor Yanagawa took his doctorate in economics from The University of Tokyo. He specializes in contract theory
and the study of financial contracts.

This is a translation of a paper originally published in Japanese. NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul
Copyright Ⓒ 2018 by Nippon Institute for Research Advancement

My Vision No.35
2018.4
Expert Opinions

Open Data and Algorithmic Regulation
There are those who say that government should just stay out ofregulating many areas and let “the market” sort things out. But there
is no such thing as an unregulated market. Effective markets are
actually the outcome of effective regulations.
We can learn a great deal about regulation by looking at the greatst
21 century internet platforms. Imagine search engines without the“regulatory system” of search algorithms, email without spam filtering,financial systems and online payment without fraud detection,
ecommerce systems without product recommendations and ratings.
Just as companies in these industries build regulatory mechanisms to
Tim O’Reilly
manage their platforms, government exists as a platform to ensure theFounder and CEO,O'Reilly Media Inc.
success of our society, and that platform needs to be well regulated!
Part of the problem is that government regulations haven’t kept up
with the scale and speed of the modern economy. Governments typically have a mountain of paper
rules and inefficient processes, and little ability to adjust the rules or the processes when they
discover unintended results. The normal regulatory model focuses on the rules rather than theoutcomes. Laws should specify goals, rights, desired outcomes, authorities, and limits. If specified
broadly, laws can stand the test of time. Regulations, which specify how to execute those laws inmuch more detail, should be regarded in much the same way that programmers regard their code
and algorithms, that is, as a constantly updated toolset to achieve the outcomes specified in thelaws.
We are at a unique time when new technologies make it possible to reduce the amount ofregulation while actually increasing the amount of oversight and production of desirable outcomes.
Increasingly, our interactions with businesses, government, and the built environment arebecoming digital, and thus amenable to creative forms of measurement, and ultimately algorithmic
regulation.
Every commercial website not only measures its traffic, but constantly makes adjustments toremove features that are unused and to test new ones in their place. These websites commonlymeasure users’ time on site and abandon rate, and analyze the paths people use to reach thedesired information. Simple web metrics like these are one simple kind of algorithmic regulationthat could lead to a massive simplification of government websites and reduction of government IT
cost. This is even more true when we enter the world of mobile applications, ubiquitous sensors,
the Internet of Things, and Artificial Intelligence.
The use of algorithmic regulation by government increases the power of regulators and could
lead to abuses. “Mission creep” is a real risk. The answer to this risk is to put stringent safeguards
in place to limit the use of collected data beyond the original purpose. The data used to makedeterminations should be auditable, and whenever possible, open for public inspection.
We’re just at the beginning of thinking about how measurement, outcomes, and regulation
come together, but there’s no question that government needs to participate in the big data
algorithmic revolution, to simplify and make regulation more effective.
Tim O’Reilly is the founder and CEO of O’Reilly Media, Inc. O’Reilly Media “delivers online learning, publishes
books, runs conferences, urges companies to create more value than they capture, and tries to change the world byspreading and amplifying the knowledge of innovators.” Mr. O’Reilly’s main focus is the impact of technology on theeconomy and society, and the possibilities that this creates. With the launch of the Gov 2.0 Summit in 2009, heestablished an ongoing forum for discussion regarding the modernization of government technology. He argues thatthe real secret of success in “Government 2.0” is thinking about government as a platform.
Mr. O’Reilly is also the author of numerous books and articles, including WTF?: What’s the Future and Why It’s Up

to Us.

This is a translation of a paper originally published in Japanese. NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul
Copyright Ⓒ 2018 by Nippon Institute for Research Advancement

My Vision No.35
2018.4
Expert Opinions

RegTech can play a Key Role in the Enhancementof Compliance Management
Diversifying social value systems and the evolution of IT
have broadened the concept of corporate compliance. Today, in
addition to compliance with laws and regulations, elements
including CSR and corporate ethics have also come to beconsidered aspects of compliance. For example, among the
successive incidents of falsification of quality data that occurredin 2017, there were cases which did not, strictly speaking,violate laws or regulations, but simply violated the terms ofcontracts with business partners. However, even if actions do
not violate laws or regulations, if they are regarded socially as
Masataka Hayakawa
unacceptable actions, they represent a violation of compliance,
and it is difficult to predict or control how the damage for the
Senior Partner, Atsumi & Sakai
company involved will spread. In addition to complying withlaws and regulations, companies are under a greater requirement than ever to respond
appropriately to the demands of society and their various stakeholders, including consumers,
shareholders, business partners and employees.
Against this background, RegTech has the potential to play a key role in the realization of acontemporary style of corporate compliance. To ensure thorough compliance with laws andregulations, companies are required not only to comprehensively and accurately understand thelaws and regulations that they must observe in the course of their business procedures, but also to
be fast enough to respond immediately to frequent revisions in laws and regulations, guidelines,
etc. These requirements are highly compatible with the application of technological means. Using
RegTech, it would be possible to immediately detect violations of laws and regulations in the field,
for example in a factory in the manufacturing industry, and, in addition, to put in place measures,for example, to preserve and prevent the falsification of data related to the reliability of quality.
The key to risk management is, while being aware that illicit activities and misconduct will
inevitably occur, to determine how to identify such incidents at an early stage and nip them in thebud before the problem becomes worse.
In the future, companies should reduce the number of personnel engaged in processes that canbe automated through the use of RegTech, and direct their human resources and expenditure into
compliance management that responds appropriately to the demands of society and stakeholders
and increases corporate value, for example the implementation of CSR initiatives that consider theenvironment or human rights. Compliance management of this type is precisely an area in whichhumans rather than machines must make judgments. In order to more effectively realize this goal
throughout society as a whole, it will be necessary for information and data concerning all forms ofregulation to be shared between, and utilized by, companies and the government and otherregulatory authorities. It will be important to make efforts towards the establishment of
infrastructure that enables information that is essential to enabling companies to verify laws andregulations (during court cases, for example, but also in relation to administrative precedents thathave not yet been enshrined in laws and regulations, etc.) to be made public and supplied by both
the regulatory authorities and companies, and for this information and data to be utilized as apublic good.
Mr. Hayakawa is a lawyer working in the area of compliance, encompassing crisis management responses involving
corporate misconduct and other issues, and the provision of advice regarding the construction and operation ofinternal whistleblowing systems. He is also actively involved in providing support for the creation of businesses
using technology, in particular AI. Mr. Hayakawa is a graduate of The University of Tokyo’s Faculty of Law, andtrained at the Legal Training and Research Institute of the Supreme Court of Japan. He served as a publicprosecutor from 2000 to 2014, and was registered as an attorney in 2014. During his period as a public prosecutor,
Mr. Hayakawa was a member of the Special Investigation Department of the Tokyo District Public Prosecutor's
Office and the General Affairs Division of the Ministry of Justice’s Criminal Affairs Bureau. He is a board memberof the AI Business Creation Association and a Certified Fraud Examiner. In addition to holding seminars andgiving lectures, Mr. Hayakawa is also a frequent contributor to legal journals.
This is a translation of a paper originally published in Japanese. NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul
Copyright Ⓒ 2018 by Nippon Institute for Research Advancement

My Vision No.35
2018.4
Expert Opinions

A Technological Response to Regulation for
an Era of Technological Innovation
The essence of RegTech is the concept that we will be unable toregulate technology unless we respond via technology. The
revolution occurring in the financial world – the appearance of
virtual currencies based on the blockchain, structural changes withthe rise of FinTech, etc. – is a revolution driven by technology. The
scandals that occur against this background, such as the collapse of
Mt. Gox and the CoinCheck theft, originate in technology, andregulatory authorities have no option but to clarify these problems
via technology. As situations change with dizzying rapidity, in
Takamasa Sasaki
particular the rapid rise and fall in the price of Bitcoins, ensuring
President and CEO,AOS Legal Technologies, Inc.
that companies comply with the rules that have been determined isa race against time. Changing laws and sending out paper-based
directives requiring reform of business procedures will always lag behind. It is essential that thisapproach is supplemented by technology, for example automatic checks and predictive tools.
Nevertheless, even if RegTech is introduced, scandals will still occur as a result of companies
violating the rules or failing to adequately respond to regulations. This sets the scene for LegalTech.
LegalTech merges law and IT, and provides technological support for official investigative authorities,
lawyers, and corporate legal affairs departments. Since its establishment, the role of AOS Legal
Technologies has been to provide support for the recovery of erased electronic data and thepreservation of evidence. This technology is not only effective after a problem has occurred, but canalso be employed as a tool enabling regulatory authorities to monitor whether companies arecomplying with regulations before any problems occur. It can therefore also be a RegTech. The
melding of LegalTech and RegTech will further boost their effectiveness.
Because Japan’s financial authorities put in place measures to assist financial institutions
beleaguered by low interest rates, the nation now possesses the world’s most advanced level offinancial administration in the fields of virtual currencies and FinTech. The world’s attention is
focused on where this will lead. Japan is lagging behind in the introduction of both RegTech andLegalTech, but has the ability to import the best technologies from overseas and apply them toregulation and the law, polishing them in the process. A business environment of this type is an
unparalleled opportunity, and I am confident that it will assist Japan’s economy in recovering fromits “lost” 20 years.
Mr. Sasaki is involved in a number of LegalTech businesses centering on data storage and data transmission
technologies. Following graduation from Waseda University’s Faculty of Science and Engineering, he worked in OS
development for a major computer manufacturer before founding AOS Technologies in 1995. In 2000, the company
commenced marketing the data recovery software FINALDATA, which received numerous awards, including the
Nikkei Award for Excellence in the Nikkei Superior Products and Services Awards. In 2012, Mr. Sasaki founded
AOS Legal Technologies. In 2015, the company was awarded the Minister of Economy, Trade and Industry’s Awardin the Japan New Business Conference Council’s Japan New Business Creation Awards (the highest award in the“Entrepreneur” category). In 2016, Mr. Sasaki founded APIbank, Japan’s first API Exchange. In addition to hisbusiness activities, he is also the author of numerous books and articles.

This is a translation of a paper originally published in Japanese. NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul
Copyright Ⓒ 2018 by Nippon Institute for Research Advancement

My Vision No.35
2018.4
Expert Opinions

RegTech provides a Background Supporting
Mechanism – Managers must promote Digitalization
RegTech provides an infrastructural mechanism that functions in
the background to support a safe and secure society. The developmentof RegTech was spurred by the large-scale strengthening of financial
regulation following the global financial crisis. The number ofregulations and the amount of the fines associated with a violation of
the rules are both increasing year-by-year. For the financial world, thecost of responding to regulations has become enormous, and payments
to be made in the event of a breach of the regulations will be figured inunits of trillions of yen. This situation has driven the transition from
Hiroyuki Morikawa
analog responses – in which actual humans read and process documents
Professor, Graduate School
extending to tens of thousands of pages – to technological responses
of Engineering,
involving the digitalization of the content of regulations. As an
The University of Tokyo
expanding technology that helps to ensure compliance with regulations,
RegTech will function out of sight of users, but can be expected to support the safety and security offinancial services more rigorously and at lower cost.
The digitalization of procedures related to regulations will not be limited to the financial
industry, but will advance in other industries also. Because all businesses are potential users of
RegTech, the market scale for the technology is considerably larger than that of businesses
targeting consumers. In general, BtoB has greater potential to generate fundamental innovation
than BtoC. Spreading unrecognized by consumers, RegTech has the capacity to effect a complete
revolution in the underlying structures of society in five to ten years. Like the steam engine orelectricity before it, it will support social infrastructure and transform our lifestyles.
If Japanese companies take the lead in the use of RegTech platforms, it will generatesignificant business opportunities. Unfortunately, however, in Japan there are numerous BtoC
ventures, but few BtoB businesses. The issue for Japan is how to increase the number of BtoB
ventures. Digital business involves considerable risk, and RegTech itself presents the difficultythat only individuals intimately familiar with their specific industry and the business environment
are able to use it in creating new businesses. Like the role of the Marine Corps in military
operations, the mission is extremely risky; however, it is essential that companies engage with it,
keeping their footwork nimble. It is my hope that Japanese managers will continue to engage withdigitalization at their work sites, and will adopt a stance of tolerant acceptance even if their efforts
do not at first succeed.
Professor Morikawa’s fields of specialization are the IoT, M2M, big data and wireless communications. Advancing
the development of technologies that will provide the foundation for a future information network society, he seeks
to realize major structural change in industry, the economy and society through the use of data. Professor
Morikawa completed coursework in the doctoral program of The University of Tokyo’s Graduate School ofEngineering, and holds a doctorate in engineering. He took his present position in 2006, following positions
including a term as an Associate Professor in the Graduate School of Engineering, The University of Tokyo. From2007 to 2017, Professor Morikawa was a Professor in The University of Tokyo Research Center for Advanced
Science and Technology. Professor Morikawa has also held a number of official positions, including as a member of
the Information and Communications Council of the Ministry of Internal Affairs and Communications and ViceChairperson of the OECD’s Committee on Digital Economy Policy. He is also the author of numerous books andarticles.

This is a translation of a paper originally published in Japanese. NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul
Copyright Ⓒ 2018 by Nippon Institute for Research Advancement

My Vision No.35
2018.4
Expert Opinions

Harnessing the Enormous Potential of RegTech
The domain of “RegTech” (Regulation Technology) is still
relatively undefined, since it is a new area, with a wide range ofinterpretations in how much is considered “regulation.” Nevertheless,the relatively undefined state presents opportunities. My own
definition of RegTech is extremely simple – I understand it astechnology applied to regulation to enable the formulation, execution,compliance and monitoring of regulatory activities.
The domain of regulatory compliance – in which firms must ensurethat they comply with regulations – is a fast growing business area,
Kenji Kushidaespecially in finance. Requirements to detect and report activities such
Japan Program Researchas fraud or suspicious transactions require sophisticated algorithms
Scholar, Walter H.
and can be aided by Artificial Intelligence, and the amounts paid by
Shorenstein Asia-Pacificlarge firms in fines provide a large market opportunity for compliance
Research Center,
Stanford University
RegTech. In other areas such as formulating contracts that comply withvarious local regulations, and in uses such as engaging in intercompany transactions of intellectual property, RegTech solutions can potentially decreasetransaction costs significantly.
Arguably one of the most significant potential domains for RegTech to have an impact on society
is in areas where the private sector provides services or information that governments cannot, or
choose not to – at low cost. In the US, for example, the Trump administration has pulled back fromperforming many of the tasks that one might expect government to provide, such as theEnvironmental Protection Agency sharply curtailing data collection about air and water pollution.
As a result, a wave of start-ups are joining with local municipalities to monitor environmental datain the place of the government using low-cost sensors. In Japan also, the impetus towards harnessing
RegTech for tasks beyond the government’s scope as the population ages is accelerating. Managing
elder care, for example, requires coordination among various actors, including physicians,
pharmacies, local government offices, care providers, family, and local community members.
Companies have begun providing services that include local government offices as part of theireldercare management services; this could be considered RegTech as well.
Recent developments in RegTech and its vast potential are driven by the transformation ofcomputing power from a scarce to an abundant resource. The ability to collect vast amounts of data
at extremely low cost, and processing that data with global-scale computing resources have driven
the world into new frontiers of what activities and data can be measured, captured, optimized, andtransformed. The Internet of Things (IoT) and breakthroughs in various forms of AI, such as deeplearning and machine learning, are moving our society much closer to capturing a wide spectrum ofactivities linking governments and companies, governments and civil society, companies tocompanies in varying regulatory environments, and between people in various national contexts. Allof this is input to RegTech. Market opportunities for startups will arise from inefficiencies and “painpoints” of individuals and companies. As high end tools and services become commoditized andavailable widely at low prices, RegTech will penetrate into all aspects of society.
Dr. Kushida conducts research on the IT industry and mechanisms for innovation from the perspective of political
economy. He is particularly focused on the economic ecosystem of Silicon Valley and analyzing Japanese and US
start-ups. Dr. Kushida is the Project Leader of the Stanford Silicon Valley – New Japan Project. Schooled at aninternational school in Tokyo, he went on to study economics and East Asian studies at Stanford University. He
took his present position after receiving his Ph.D. in political science from UC Berkeley.
This is a translation of a paper originally published in Japanese. NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul
Copyright Ⓒ 2018 by Nippon Institute for Research Advancement