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Japan’s FSA Sets New Crypto Regulatory Paradigm

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Japan’s FSA Sets New Crypto Regulatory Paradigm

The Financial Services Agency (FSA) has announced a new regulatory paradigm that will govern its oversight of the cryptocurrency exchange platforms in the country. Local media sources report that the FSA is strengthening its statutory mandate in a bid to prevent the reoccurrence of another high-profile cryptocurrency exchange hack.

A More Practical Approach to Regulating Crypto Exchanges

Coincheck, one of the exchange platforms in the country suffered a major crypto heist to the tune of half a billion dollars. Monex has since acquired the platform. The FSA for their part has been hard at work trying to reform the operations of cryptocurrency exchanges in Japan.

Commenting on the new regulatory paradigm, an inside source at the FSA told the local media that the agency felt a more hands-on approach was necessary. The source also said that:

“Without the necessary know-how, we’ve been feeling our way through the dark on how thoroughly we should check these different aspects.”

To this end, the FSA is determined to sanitize the crypto exchange arena, making sure that platforms are operating according to industry best practices. The crypto watchdog also aims to eliminate money laundering via cryptocurrency transactions as well as offer protection for investors.

As a start, the regulatory body will carefully examine and review the registration applications of platforms when it resumes accepting such requests. There are reports that such a move would be taken in the summer. After the initial registration process, the FSA plans to do an on-the-spot assessment of the operating infrastructure available at these platforms.

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Only those who pass this assessment will be given a license to operate in the country. The FSA began licensing cryptocurrency exchange platforms in 2017 as the nation cemented its place as a crypto-friendly nation. Presently, there are 16 registered crypto exchange service providers in Japan.

The New Five-Point Regulatory Paradigm

The following points make up the new five-point regulatory strategy that has been set forth by the FSA.

Cryptocurrency exchange platforms must upgrade their security framework to include cold wallet storage of crypto coins and two-factor authentication (2FA). The former is to keep tokens safe from hackers while the latter is to provide an additional security layer against unauthorized transactions. Many successful hacking attempts in the crypto world have been due to the presence of funds in online wallets that are known to be prone to malicious cyber attacks.

The FSA also wants cryptocurrency exchange platforms to prioritize KYC and AML procedures. As such, there will be strict observance of customer ID verification especially in the case of large transactions.

The third point in the new five-point paradigm stipulates that all exchange platforms adopt best practices in their business dealings. The FSA is keen on eliminating insider trading and the unauthorized use of customer funds. Also, corporate assets must be differentiated from customer assets. The agency also instructs that crypto exchange platforms carry out numerous inspections on the accounts of each customer on a daily basis.

The fourth and fifth point has to do with restricting particular cryptocurrencies and creating a clear organizational structure for exchange platforms in the country. The FSA wants all platforms to stop listing privacy-focused cryptocurrencies. These specific tokens provide complete anonymity and have been identified as being famous for money laundering and other illicit activities.

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