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Japan's FSA outlines new five-point criteria for cryptocurrency exchange regulations

09 May 2018

Under this criteria, FSA will make sure that exchanges do not store currency in internet-connected computers and set up multiple passwords for currency transfers. Existing operators would also be required to meet these requirements.

The new rules go beyond documentation and will involve on-site visits from officials as well.

After completing the inspections, the FSA firmly stated that five areas of the Japanese business need more attention, which include "building a business management system, a management system that prevents money laundering and other illegal matters, an effective bookkeeping system, a management system that places great emphasis on user protections, and a system risk and outsourcing management system". To keep customer assets separate from exchange assets, the exchanges will have to monitor customer account balances numerous times per day for signs of diversions.

Customer assets will need to be managed separately from the exchanges' own assets, and the exchanges will need to ensure that employees will not be able to use client funds.

Also, Japan has not been very favourable of anonymous cryptocurrencies like ZCash.

Under the fourth rule, the exchanges allowing a high level of anonymity and easy money laundering tactics will be banned.

The intention to establish the meeting was first declared in March as a reaction to the FSA's expanding administrative activities, including nearby investigations to check exchange' safety efforts.

There will also be new rules regarding the types of cryptocurrencies used at registered exchanges. As per the fifth rule exchanges will need to carry out an internal procedure and separate shareholders from management so that the employees do not manipulate the system for their personal gains. Crypto exchanges such as Tokyo Gateway and Mr. Exchange have shuttered operations citing regulatory pressure from FSA. After reviewing registration applications from exchanges, the FSA will send inspectors to those that pass the initial screening.

By not having sufficient expertise with exchanges, the agency has been "feeling our way through the dark on how thoroughly we should check these different aspects", an unnamed agency source said. Nikkei reports that the FSA plans to begin using their new requirements as soon as the agency starts to accept new registrations. The new system will enable the agency to conduct a detailed assessment and identify risks ahead of time.

The move follows the major security breach at Coincheck in which the company lost almost $530 million in NEM tokens to hackers. Naturally, it is also one of the biggest platforms for crypto trading and most of the exchanges are eager to serve Japanese traders. One reason for the low sum is that it appeared unlikely that the country's the FSA would grant the company a license under its previous management structure.

Japan's FSA outlines new five-point criteria for cryptocurrency exchange regulations