In the news released this week, leading cryptocurrency exchanges have decided to move their business out of Japan. While one of the leading exchanges, Kraken, were vague on the “whys and hows,” it has now been thought that the newest operational rules may be the leading factor.
The Japanese Financial Services Agency (FSA) has now imposed five strict regulations by which all new and existing cryptocurrency exchanges must abide. These regulations, they hope, will help to protect their citizens while promoting compliance across the field as well. The Japanese financial regulator also believes they may help to prevent another digital heist such as the hacking of Coincheck in which investors lost 58 billion yen.
The first stage of implementing these rules begins with changes to the registration process. Not only do new exchanges have to provide all necessary documentation to start their trade, but they must also agree to preliminary visits to understand the operational aspect of the exchange.
The five rules following on from registration are as follows.
1. System Management
System management must have a heightened security component to protect users from hacking. While most exchanges already do have reasonably secure systems in place, there will be a few that may need to make some substantial changes. Currency can’t be stored on computers that are connected to the internet, and currency transfers must have several different passwords for a new layer of protection.
2. Money laundering Preventative Measures
Cryptocurrency, while lucrative for investors who follow the rules, is becoming an easy way in which for people to launder money. Therefore, the second restriction imposed by the Japanese government is even stricter money-laundering preventative measures. All exchanges must put systems in place to prevent laundering from taking place, which could include customer identification for large money transfers.
3. Customer Asset Management
The third requirement by the FSA is quite a big one, and it’s sure to have a dramatic impact on exchanges which are currently trying to decide whether to stay or go. Customer assets must now be managed separately from exchange assets. As a result, the operators of the exchange must then check the account balances of their customers many times per day, looking for signs of diversions.
This rule aims to stop their operators from touching client money or using their cryptocurrency.
4. Cryptocurrency Restrictions
Japan is trying to make the use of cryptocurrency more transparent, even though it’s called a decentralized, anonymous currency for a reason. Therefore, any cryptocurrencies that want to operate on the terms of anonymity will not be allowed to do so. The hope is that it can reduce the instance of money laundering. The impact of this rule is that privacy coins such as Monero may be delisted.
5. Strengthening of Internal Procedures
The final rule is also quite drastic and relates to the overall operations and procedures of any exchange. Shareholders must now be separated from the management of the exchange, with separate roles for each employee. Those involved in system development will not have a part in asset management and vice versa. As a result, it’s hoped that employees will not be able to manipulate the system for personal gains.
Japan is now just one of many countries looking to tighten their grip on digital currency, but only time will tell what effect this will have on exchanges. With the new release of these rules, it’s going to be interesting to see which leading exchanges decide to leave Japan and grow their exchanges in more crypto-friendly countries.