The Financial Services Agency (FSA), Japan’s regulatory watchdog, like many other oversight agencies around the world, is doing its level best to deal with digital currencies in an accommodative way without stifling innovation. The job is going to get tougher. According to an unnamed FSA staff member, the regulatory agency has received 190 cryptocurrency exchange license applications during 2018.
The FSA had recently reorganized internally, creating a new Policy and Markets Bureau, which is “tasked with developing a legal framework that addresses the rapid growth of the fintech sector”. Over the past year, the enforcement group has sent out punishment notices to several exchanges, citing the need for setting higher standards for customer protection and anti-money-laundering measures. The commissioner had also said back in August that the agency wanted the crypto industry to “grow under appropriate regulation”, and he offered further reassurances that his group had “no intention to curb [the crypto industry] excessively.”
The FSA even went a step further in October by sanctioning self-regulation, as the more prudent route under current circumstances. At that time, Reuters reported:
The Japanese financial regulatory body, FSA, has granted the Japan Virtual Currency Exchange Association (JVCEA), the power to monitor and sanction digital currency exchanges. Part of the JVCEA’s regulatory functions includes laying down rules that protect investors’ funds and ensuring compliance among exchanges.
When this announcement was made, there were rumored to be as many as 160 applications for licenses from potential exchange entities. This figure has obviously grown, despite the major meltdown in crypto valuations over 2018. The FSA, however, has been more concerned with the safety and soundness of the crypto exchange networks that service Japanese investors. Following a professional hack of the new Coincheck exchange, the agency moved swiftly with what it calls “improvement notices”.
According to another report:
Coincheck was a major target for organized hackers, who stole NEM tokens valued at a staggering figure of $523 million. In another incident, the Zaif exchange was robbed of a variety of coins for a much lesser amount, but about $50 million just the same. Asian exchanges have suffered more attacks than their Western brethren. Many reasons have been cited, the major one being lax security protocols and firewalls.
Back in April, Kraken, a large crypto exchange, based in California, announced that it would be shutting down its trading services for Japanese citizens, as of June. The U.S. firm cited rising costs, but it also said that it might return at a future date. The firm said:
Suspending services for Japan residents will allow us to better focus on our resources to improve in other geographical areas.
If Kraken created a vacuum of sorts, it appears that several other firms are rushing to fill the void.
Japanese National Police Agency (NPA) had also gotten upon this exchange bandwagon late in 2017. It issued regulations that required the reporting of suspicious activity by exchanges. The NPA recently announced that it had received 5,944 such reports from the first of the year through October.