FSA struggling over cryptocurrency exchange operators

April 5, 2018

Tokyo- Japan's Financial Services Agency is struggling to adjust controls over cryptocurrency exchange operators in the face of increasing speculative trading and a recent massive customer asset theft.

A year has passed since the enforcement of the revised payment services law, designed to put such operators under the FSA's supervision to protect users and prevent money laundering.

While there is an increasing need to tighten its grip on the emerging industry, the FSA finds it hard to achieve a good balance between regulation and industry promotion.

Excessive regulation would hamper the spread of virtual currencies, a low-cost means of financial transactions with parties overseas.

The FSA recognizes the potential of digital currencies and related technologies.

The revised law requires cryptocurrency exchange operators to register with the FSA. The registration system has easier capital and other requirements than other systems, in order to make it easier for newcomers to start business.

Even under the registration system, the financial industry regulator checks applicants as carefully as under license systems, in order to encourage operators to make improvements, according to a senior FSA official.

The FSA warned against speculative transactions, as the value of one bitcoin surged above 2 million yen in December 2017 from levels above 100,000 yen in January that year.

The spike was accompanied by an influx of investors into the digital currency market in Japan, where concerns about the industry receded following the enforcement of the law revision and the introduction of the registration system, according to a senior industry official.

Coincheck Inc., which had customer assets worth 58 billion yen stolen through hacking, is a notable example of operators that rode the wave of speculative transactions.

Coincheck conducted a television advertising blitz even when it was still going through registration procedures. Meanwhile, the monthly value of transactions on its exchange approached 4 trillion yen in December 2017, over 10 times the level half a year before.

In January this year, the massive theft hit the company, reflecting poor security. "We could not hire sufficient technicians," President Koichiro Wada has said, explaining the background to the incident.

The problem led the FSA to switch to stricter regulation.

The agency raided some already registered operators and all operators under registration screenings, as well as issuing business improvement orders to seven operators including Coincheck and business suspension orders to two of them.

The regulator also tightened registration screenings, leading five out of the 16 companies being processed to withdraw their applications.

"Many operators are not sufficiently ready to manage customer assets," a senior FSA official said. Meanwhile, some observers say the FSA agency did not have a system or know-how to promote the sound growth of participants in the emerging industry.

In a recent interview with Jiji Press, Taizen Okuyama, president of cryptocurrency exchange operator Money Partners Co., called for legal measures against speculative trading.

Speculation-backed transactions prevent the widespread use of digital currencies as a means of settlement, said Okuyama, who has been named head of a new industry group.

"It is necessary to foster healthy growth and restore trust" in cryptocurrencies by implementing self-regulation and drawing up rules to promote virtual currencies, he said. Jiji Press