The first material consequence of Japan’s new crypto regulations has come to pass. The world’s largest crypto derivatives exchange, BitMex, has announced that it is officially discontinuing service for its Japanese customers. New rules for digital assets, which used to be called virtual currencies in Japan, set new standards for how exchanges are to handle client funds and process transactions. The new regulations, adopted in 2019, will go into effect on May 1. It appears that the burdens of compliance must have been too great for the management team of the Seychelles-based BitMex to consider.
In a notice to clients, BitMex stated that:
With effect from 23:00:00 JST 30 April 2020 (for users registering for the first time), and 00:00:00 JST 1 May 2020 (for existing registered users), we are restricting access to users who are Japan residents. This will mean a user who is a Japan resident registering on the BitMEX platform for the first time cannot trade and any existing registered customers who are Japan residents cannot place orders that would open a new position or increase an existing open position.
In order to redefine cryptocurrencies within the Japanese legal framework, the Japanes cabinet adopted two new pieces of legislation in 2019 – the Payment Services Act (PSA) and the Financial Instruments and Exchange Act (FIEA). Among other things, the new legislation instituted strict custody requirements related to the segregation of client assets, which could necessitate the use of an independent third party agent to provide such services.
The FIEA also included one other important change that would impact BitMex. The sale and use of crypto derivatives, currently 80% of trading activity in Japan and the primary product offering of BitMex, would suddenly fall within the purview of the FIEA. Up to now, the Wild-West atmosphere promoted by crypto option providers has existed without even the hint of regulatory oversight, especially in Asia, where large amounts of leverage and heavy betting go hand-in-hand.
There are other sections of the law that deal with registration, advertising, information disclosures, and how the firm handles user transaction records, but general compliance and custodial segregation of client deposits seem to be the more burdensome. There are also to be stricter registration requirements related to Security Token Offerings (STOs) and Initial Coin Offerings (ICOs), but it is unclear if BitMex had any plans to employ these funding mechanisms going forward.
The Financial Services Agency (FSA), Japan’s primary regulator with oversight responsibility in this new arena of digital assets, has been stepping up its level of activity in the crypto space for some time. The Mt. Gox compromise and various ICO fraud schemes have hardened the Japanese regulator’s resolve to clean up what it perceives as chaos.
Despite the new changes, BitMex, however, does hold out hope for its Japanese customer base. Its statement also declared:
We support the efforts of regulators to help establish standards for cryptocurrency products that will underpin the advancement of this rapidly growing asset class. We will continue to work with the Japanese regulatory authorities to support their aims for the Japan market and will keep our Japan users updated.