Japan’s Financial Watchdog Unveils New Guidelines for Cryptocurrency Exchanges

In attempts to prevent another Coincheck-like heist, Japan’s Financial Services Agency (FSA) has unveiled stricter standards for cryptocurrency exchanges that register with the financial watchdog.

FSA: Stricter Guidelines for Exchanges

Unlike neighboring China, the Japanese government has worked to grow the nascent cryptocurrency industry since it began recognizing Bitcoin and other digital currencies as a valid form of payment in April of 2017. In another step towards legitimization, it is now focusing on improving compliance and establishing measures to protect customer assets.

On top of thorough documentation reviews, the FSA explains that the new registration process will include preliminary visits to exchanges to help ascertain how they operate. According to Nikkei Asian Reviewthe exchanges that register with the agency will have to follow five new criteria.

The first of the five criteria relates to system management. The FSA will ask that exchanges do not store digital currency on internet-connected computers and will also require multiple passwords for currency transfers. This means that funds will have to be stored using offline, cold storage methods, and access to these wallets will necessitate more than one person’s login information.

Secondly, exchanges will be required to be vigilant in preventing money laundering, using such means as verifying customer identification for large transfers, and following know-your-customer (KYC) and anti-money laundering (AML) guidelines.

Thirdly, to ensure that customer assets are kept and managed separately from exchange-held assets, operators will be required to monitor customer account balances several times a day to look for unexpected activity. The FSA will also ask operators to have rules in place to keep their employees from accessing and utilizing client’s funds.

The fourth criteria places restrictions on the kinds of cryptocurrencies permitted at FSA-registered exchanges. Due to fears of the potential for money laundering, coins that grant a particularly high level of anonymity will not be permitted — this could potentially put cryptocurrencies like Monero and Zcash under scrutiny from Japanese officials.

Finally, the FSA will require stricter internal regulations which will keep shareholders and management separate. System development roles will also be kept separate from asset management roles to lessen the likelihood of employees attempting to manipulate the system for their own gain.

Moving Forward

“Without the necessary know-how, we’ve been feeling our way through the dark on how thoroughly we should check these different aspects,” a source from the FSA said. The new five-point framework aims to help the agency perform detailed assessments and identify potential risks in advance of taking exchanges on board.

The FSA hopes that these new guidelines will strengthen the stronger exchanges while forcing the weaker ones out. Generally, the steps the agency is taking will likely be a positive development for the space, helping legitimize cryptocurrencies and bring the industry further into the mainstream.

According to the reports, the FSA will start applying the new framework when it begins accepting new registration applications again — likely this summer. It will require existing exchange operators that are already registered with the agency to meet the new standards as well. It’s hoped that these measures will help prevent a repeat hack such as that took place at Tokyo-based Coincheck.

Featured image from Shutterstock.

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