It wasn’t long ago when Japan was an early mover in the region to recognize Bitcoin as legal tender and endorse 11 cryptocurrency exchanges last year. Japanese companies like Rakuten and Line were launching exchanges or their own coins amid the global thrill of skyrocketing Bitcoin prices. Even as China made sweeping bans to ban trade on exchanges and the launch of new crypto coins and South Korea threatened to follow suit, Japan appeared to be the voice of hope in a continent swept in uncertainty.

But the sting of a $500 million hack on local exchange Coincheck in January has put Japan’s reputation as a blockchain-friendly environment to the test. Once dubbed a crypto haven that lured foreign companies to set up blockchain and cryptocurrency projects, the mood has darkened in the country as authorities attempt to rein in the market, industry sources say.

Before the hack, people dove into crypto fever without regard for how to protect themselves or secure their assets; the concept was red hot, just like in South Korea, says blockchain entrepreneur Koji Higashi, who cofounded Japanese crypto wallet IndieSquare. “They were just interested in knowing which coin to go to next.”

But the optimism masked problems bubbling under the surface. Despite regulations on exchanges and ICOs newly established last year, scam ICOs found the opportunity to flood Japan, taking advantage of people’s low understanding of the technology, Higashi says.

Selling unregistered tokens is illegal, as every ICO must work with a local licensed exchange. But foreign ICOs still managed to trickle into Japan when local companies invited entrepreneurs from overseas to host seminars or workshops, where they would then sell their coins to their followers, according to Higashi.

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On top of that, he adds, exchanges have prioritized convenience over security to win over users. Coincheck, which marketed itself as being user-friendly and convenient for impatient beginners, had been managing users’ funds on a hot wallet–an online crypto account that transfers funds faster–rather than a more secure cold wallet, which is stored offline like a vault and much harder to hack.

Japanese regulators appeared either positive or neutral about cryptocurrency, giving the country a default reputation as a haven compared to hardline countries like China. But that’s mostly because they were toeing a gray line, Higashi says.

“It’s not that Japan is an ICO haven, but there is no enforcement, and we will see massive issues in the future,” Higashi says.

Then, on Jan. 26, the Coincheck hack: The exchange’s users lost $530 million worth of NEM tokens in the second largest crypto heist in Japan after Mt.Gox in 2014. Only then were regulators forced to face the music, as the issue became highly publicized in local and foreign media.

More on Forbes: How The $500 Million Coincheck Hack Exposes Deeper Security Flaws In Corporate Japan

The Japanese government had wanted to promote fast growth of the cryptocurrency business, becoming first movers in regulation, says Katsuya Konno, chief financial officer of Japanese exchange operator Quoine. “But due to the Coincheck hacking, the FSA [Financial Services Agency] turned the strategy from growth to monitoring.”

After the hack, the FSA were focused on two things: investigating exchanges to prevent another hack and cracking down on scams and illegal ICOs. They ensured that exchanges were managing customers’ funds with basic security measures, criticizing a handful of exchanges including Coincheck for poor internal controls.

One reason Coincheck was the target of a hack, Higashi notes, is that its wide offerings of non-mainstream altcoins, each with their respective characteristics and specifications, bring security risks of their own as it’s difficult to secure every framework.

Regulators also began cracking down on scam and illegal foreign ICOs selling to the Japanese public, including out chasing out Macau-based Blockchain Lab in February and reportedly Binance in March, which the CEO refutes. Coincheck resumed operations and refunded $430 million to its hacked users in mid-March.

The FSA has been focusing on reviewing the existing exchanges, reportedly including physical visits to the exchange offices. Japanese regulators are more conservative and making efforts to speak with centralized exchanges about cryptocurrency issues, says Alex Shin, partner at Seoul-based blockchain accelerator Hashed, which is exploring the Tokyo market.

But licensed exchanges are banned from adding new coins, and “we cannot have any discussion about the ICO business in Japan,” adds Konno. The law itself does not ban ICOs because the cryptocurrency law was passed last April before ICOs became popular, but the government has made its stance against them clear. “There is a big difference between the existing institution and the act itself.”

More on Forbes: An ICO Ban In Japan Is Still A ‘Definite Possibility’

Because regulations take up to two years to legislate, the FSA is to authorize in July the newly established Japan Cryptocurrency Exchange Business Association of 16 member licensed exchanges to set the rules that the existing rulebook does not address yet, such as initial coin offerings, security procedures like Anti-Money Laundering (AML) and Know Your Customer (KYC), and market manipulation, says Konno, whose exchange is a member. Tackling existing crypto crimes such as embezzlement and internal fraud will be the top of its priority list, he says.

Four months after the hack, trade is still recovering. The Japanese yen, which traded 63% of the world’s Bitcoin in October 2017, now trades 34% of the most popular crypto coin , according to Crypto Compare data.

The number of new customers has been “reducing dramatically” since the Coincheck hack, Konno says.

Customers who once demanded lightning speed and usability are now caring about security, Konno adds. His exchange stresses security, forgoing the use of hot wallets and manually checking the wallet address and amount on every withdrawal request. “After the Coincheck incident, our users have come to know the importance of what we do now.”

Industry sources believe Japan and neighboring South Korea are waiting for U.S. to decide on regulations before laying out rules. The Securities Exchange Commission has suggested being cautious but open to ICOs, but there is still need for regulation to protect investors. “Judging by that, they’ll probably figure out how they want to shape their approach,” Shin says.

Jinyoung Park contributed to this article.

Credit : Forbes