The Financial Services Agency (FSA) of Japan is set to introduce stricter guidelines for cryptocurrency exchange platforms in the country. According to local media sources, the FSA is taking this course of action to prevent another high profile crypto hack.
CREATING A NEW PARADIGM FOR CRYPTO EXCHANGE PLATFORM REGULATIONS
Japanese cryptocurrency exchange platform Coincheck was hacked in January 2018, resulting in the theft of more than $500 million worth of crypto. In the aftermath of the Coincheck saga, the FSA has been hard at work trying to secure the country’s crypto exchange arena.
Japan has in recent years, established itself as a crypto friendly nation. The new measures by the FSA while being strict are not meant to alter that narrative. Instead, the Agency wishes to sanitize the market, protecting investors, and preventing money laundering. To this effect, the FSA has released a new five-point agenda for regulating the crypto exchange arena.
THE FIVE-POINT AGENDA
Firstly, cryptocurrency exchange platforms will adhere to robust security standards. These standards include ensuring that coins aren’t stored on online wallets and creating two-factor authentication (2-FA) for currency transfers. Online crypto storage options are notoriously prone to hacking and 2-FA helps prevent unauthorized crypto transfer.
Secondly, these exchange platforms will develop thorough know-your-customer (KYC) processes. The essence of this step is to eliminate money laundering. As a result, there will be stringent customer ID protocols for large value crypto transfers.
Thirdly, the FSA will require crypto exchange platforms to imbibe best practices regarding asset management activities. Thus, customer assets must be managed separately from the corporate exchange assets. Platforms will perform regular daily checks on customer account balances to prevent any manipulation. The Agency also wants cryptocurrency exchange platforms to provide systems in place that will prevent employees from making unauthorized trades with user funds.
The fourth point deals with restrictions on particular crypto species. The FSA has blacklisted privacy-focused cryptos which grant complete anonymity making them popular with money laundering activities. Registered platforms are henceforth prohibited from listing those cryptocurrencies.
The final point covers the structure of the exchange platforms and how they operate. The FSA is calling for a clear organizational structure within these companies. As such, there should be a separation of shareholders from the management team. Also, development and asset management roles will be separated. This separation is to prevent insider trading and other forms of internal system manipulation.
A MORE HANDS-ON APPROACH TO CRYPTOCURRENCY REGULATIONS
Speaking on the new approach, an FSA source said that the Agency is committed to a more hands-on approach to regulating the country’s crypto exchange platforms.
“Without the necessary know-how, we’ve been feeling our way through the dark on how thoroughly we should check these different aspects.”
The FSA plans to carry out a detailed review of registration documents submitted by these platforms. After that, the Agency will send inspectors to assess the systems and protocols on the ground in these platforms.
The five-point agenda is expected to come into effect when the FSA begins accepting applications for registration. The new framework also applies to existing platforms as well.