All Cryptocurrency Exchanges in Japan Must Comply With Five New Criteria

The Japanese financial regulator has imposed five new criteria for all cryptocurrency exchanges operating in the country. These rules apply to existing exchange operators as well as new ones applying for registration for the first time. On-site inspections will be conducted on all exchanges prior to approval.

Also read: Yahoo! Japan Confirms Entrance Into the Crypto Space

Preventing Coincheck 2.0

The Japanese Financial Services Agency (FSA) has set new rules for the registration of cryptocurrency exchanges, Nikkei reported on Sunday. The agency aims to promote compliance and protect customer assets as well as “forestall another digital currency heist like the Coincheck scandal,” the news outlet added.

Coincheck, one of the largest crypto exchanges in Japan, was hacked in January and lost 58 billion yen (~US$531 million) worth of the cryptocurrency NEM. The exchange has since been acquired by a leading online brokerage firm, Monex Group.

An FSA official explained to Nikkei that in addition to documentation, the registration process would now include preliminary visits to ascertain how the exchanges operate. The publication elaborated:

Exchange operators registering with the government will now need to satisfy five broad criteria.

The Five Criteria

The first of the five criteria concerns system management. The agency will ensure that exchanges “will not store currency in internet-connected computers and will have to set multiple passwords for currency transfers,” the publication detailed.

Money laundering preventative measures make up the second criterion. Exchanges “will need to work harder to prevent money laundering, through such means as verifying customer identification for large transfers.”

The management of customer assets is the third. The FSA wants to ensure that they are “carefully managed separately from exchange assets.” According to the news outlet, exchange operators will be required to check customer account balances multiple times a day for signs of diversions and “have rules in place to keep their officers from using client money or virtual currencies.”

There will also be new restrictions on the types of cryptocurrencies listed on exchanges. Specifically, the publication emphasized. “Those granting a high level of anonymity and easily used for money laundering will as a general rule be banned.” News.Bitcoin.com recently reported on rumors that the FSA is pressuring exchanges to delist privacy coins such as Monero.

Lastly, exchanges’ internal procedures must be strengthened. They “will need to separate shareholders from management. System development roles will also be separated from asset management roles to keep employees from manipulating the system for their own gain.”

5-Point Framework Applies to All Exchanges

The five criteria make up the FSA’s “new five-point framework,” allowing the agency to “perform a detailed assessment and identify potential risks in advance,” the news outlet described. The new rules will apply to existing exchanges as well as new ones entering the market. Those that cannot comply with these five rules are encouraged to exit the business.

Currently, there are 16 government-approved crypto exchanges operating in Japan. In addition, there are still seven others that are allowed to operate under the revised Fund Settlement Act while their applications are being reviewed by the agency.

According to Nikkei, the FSA is likely to start accepting new registration applications for exchanges in the summer. The agency recently revealed that there are approximately 100 companies interested in applying for registration. The news outlet elaborated:

The FSA will first review documents submitted by operators seeking government registration. It will then send inspectors to those that pass the initial screening to review their system operations and verify the number of employees.

What do you think of the FSA’s five new criteria for crypto exchanges? Let us know in the comments section below.

Images courtesy of Shutterstock and Nikkei.

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