Cryptocurrency exchange giant Coinbase isn’t concerned that Japan’s Financial Services Agency (FSA) has begun to view the crypto trading industry with a more cautious eye in the wake of several high profile exchange hacks on the regulatory agency’s watch in 2018.
Speaking with the Nikkei Asian Review, Mike Lempres, Coinbase’s chief policy officer, said that increased scrutiny of cryptocurrency exchanges applying for virtual currency licenses is Japan was actually a good thing for the San Francisco-based company because it would give them a leg up on the competition.
"The Japanese government is more focused on security," he said. "That is good for us." Discussions with the FSA are “going well,” he continued. "We are... committed to getting it done. It will certainly be in 2019."
That’s a bold claim, particularly considering that, as Nikkei notes, the FSA has not approved a virtual currency license since Dec. 2017, shortly before Tokyo-based exchange Coincheck was hacked for a record $530 million in Jan. 2018. Last month, Osaka-headquartered trading platform Zaif lost $60 million following a hack and is now struggling to compensate customers.
Coinbase believes those hacks, rather than make regulators and investors hesitant to engage with the still-nascent cryptocurrency industry, will increase demand for firms with a trustworthy track record.
"Japan has been an active large market from the very beginning, and has proved resilient as it bounces back from several bad experiences," Lempres said. "We think there is great demand for a trusted provider of services here."
Lempres explained that Coinbase devotes far more resources to securing client assets than many other cryptocurrency exchanges, with “dozens” of the firm’s 550 employees working full-time on asset security.
Indeed, a recent profile in Wired detailed the lengths to which Coinbase goes to secure cryptocurrency assets stored in its custodial “vault,” pop-up Faraday cages and all. Lempres further explained that just one percent of the company’s funds are held in online “hot wallets,” with the remaining 99 percent secured in cold storage. Moreover, those one percent of funds that are stored in Coinbase’s hot wallet are fully-insured.
However, though a global company with operations in dozens of countries, Coinbase’s security apparatus is centered in the U.S., which could lead to problems if the FSA says that it wants Coinbase Japan to physically store its assets in Japan, where the agency can more easily monitor them.
"We have everything built to protect our storage... in the U.S.," said Lempres. "We won't do anything to even raise possibility of a hack. It would be hard for us to duplicate what we do in the U.S. today in Japan and other countries."
CCN reported in June that Coinbase was plotting an expansion into Japan, with the exchange operator tapping former Morgan Stanley Japan investment banker Nao Kitazawa to serve as chief executive of Coinbase Japan.
“As in other markets, we plan to take a deliberate approach to our rollout in Japan, which means working hand-in-hand with the Japanese FSA to ensure compliance with local laws at every stage,” the firm said at the time.
Last week, reports emerged that Tiger Global, a major U.K. hedge fund, was close to completing a $500 million investment in Coinbase. Various reports differed on whether the fund was purchasing shares directly from Coinbase or on the secondary market, but in one respect they all agreed: the investment would value Coinbase at $8 billion, cementing its status as not only one of the largest cryptocurrency companies but also one of the world’s most valuable privately-held tech companies.
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