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Japan Issues First Official Rejection of Crypto Exchange License Application

Last Updated March 4, 2021 5:08 PM
Samburaj Das
Last Updated March 4, 2021 5:08 PM

Two business suspension orders and three on-site inspections later, Japan has handed down its first-ever official rejection of a cryptocurrency exchange application.

Announced by Japan’s financial regulator, the Financial Services Agency (FSA) on Thursday, the authority accused Yokohama-based FSHO of being a “corporation that has not established a system to properly and reliably carry out [services] in the virtual currency exchange industry.” As a report indicated earlier this week, the move was expected.

Although FSHO first submitted its application to register its cryptocurrency exchange on September 26, 2017, the FSA revealed its denial order follows a lack of progress by the operator in improving its operations under the FSA’s scrutiny that began in February with an on-site inspection of the firm.

The FSA, which began inspecting domestic exchanges following the $530 million hack of Tokyo-based exchange Coincheck in January, determined that FSHO lacked security measures and did not adhere to know-your-customer (KYC).

On March 8, the suspended FSHO’s operations for a month alongside a business improvement that specifically demanded the exchange to improve its system of flagging suspicious transactions that might indicate money laundering, implement countermeasures against terrorism financing and enforce trading systems that confirm settlements during transactions in real-time.

No Improvements

The FSA conducted a second on-site inspection on March 23rd to check on improvements and found none. “[T]he work related to countermeasures [of money laundering and terrorist financing] was not improved,” the authority determined, suspending FSHO for a further two months. The exchange operator was also slapped with its second business improvement order and was told to implement a “drastic reform of management system, compliance with laws and regulations [and] a proper business operation.”

The regulator also said it had authorized a delegated team of external lawyers and certified auditors to help form a new management team following the second suspension order.

However, the FSA accused the former management team of “substantially controlling” the company in decisions and projects that were “extremely important in terms of management” without obtaining the consent of the newly established team that included a director and president.

The lawyers and auditors who delegated internal audits resigned soon after, the FSA added.

“In this way, the Company has not reformed or constructed the management system anymore and has not implemented a business improvement order issued on April 6, such as not establishing a system to implement internal audits, and management It is deemed that the management system has not yet been developed,” the regulator said.

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