By According to a local report in Japan, the country’s primary financial regulator has dramatically increased its screening process of applicants registering to open cryptocurrency exchanges, to ensure that appropriate risk management strategies are in place.
The Financial Services Agency (FSA), is Japan’s financial regulator and ombudsman. The Japan Times reported a four-fold increase in the number of questions asked when screening applications for registration. The number of items on the questionnaire has therefore risen, from 100 to approximately 400 questions.
In April 2017, Japan revised the Payment Services Act. Consequently, cryptocurrencies such as Bitcoin are now legal methods of payment in Japan. The legislation has also been expanded to include a requirement for all operators of domestic cryptocurrency exchanges to obtain a license and to register with the FSA. To date, over 100 companies have demonstrated an interest in registering as cryptocurrency exchanges. However, analysists have argued that the stringent policies and legislation may act as a deterrent.
In the official guidelines published FSA, it was stipulated that “After the amended Payment Services Act took effect on April 1, 2017, only business operators registered with a competent Local Finance Bureau are allowed to operate virtual currency exchange service”.
Tightening the Screening Process
The ombudsman and regulators have made it mandatory for all applicants to now submit the meeting minutes of their board meetings, to the FSA. The revision of these documents will assist the FSA in determining if the company has sufficiently discussed measures to ensure the security of its customers’ assets and its own internal cybersecurity system, alongside its financial health during their board meetings.
Thereafter, the FSA will conduct an on-site inspection. According to the report, the inspection will be used to verify the accuracy of the documents submitted during the screening process.
The report went on to state that the agency will now transition into scrutinizing the records taken during board meetings, as well checking the “composition of an applicant company’s shareholders”. This transition is from the traditional 100-point questionnaire that was previously used, which predominantly focused on system safety security and the applicant’s financial backing.
The Japan Times cited sources when they claimed that the agency will examine the efficiency of exchanges’ internal systems installed. This was reported to “check for links to antisocial groups.”
In January, subsequent to a $530 million or ¥58 billion cryptocurrency theft, from an unlicensed Tokyo-based exchange, called Coincheck, the regulator has had to clamp down on the crypto exchange industry.
Japan’s financial regulator has already suspended a number of exchanges to date and has also requested additional improvement orders this year. After on-site inspections with licensed cryptocurrency exchanges took place, the FSA has already issued ‘business improvement orders’ to six companies. The FSA argued that some of Japan’s largest exchanges were lacking rigorous management systems and anti-money laundering measures.
It was reported by the CCN.com in early July, that the FSA is contemplating a revision of its crypto regulations by bringing exchanges under the purview of the Financial Instruments and Exchange Act (FIEA). Aligned with traditional stock brokerages, crypto exchanges may be required to manage their customers’ funds separately from corporate assets, under robust, investor protection norms.
A fortnight ago, the FSA’s new chief has ruled out “excessive” regulations, despite the reported fourfold increase in questions during the screening process.
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