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Japan Ramps up Scrutiny of New Cryptocurrency Exchange Applicants

Last Updated March 4, 2021 3:37 PM
Samburaj Das
Last Updated March 4, 2021 3:37 PM

Japan’s primary financial regulator has dramatically increased its screening process of applicants registering to open cryptocurrency exchanges, according to a local report.

The Financial Services Agency (FSA), Japan’s financial regulator and watchdog, has “increased the number of questions asked when screening applications to about 400 items”, a four-fold increase from previous norms, the Japan Times  reported on Sunday.

Following a revision to the Payment Services Act, Japan legally recognized cryptocurrencies like bitcoin as a legal method of payment in April 2017. Under the legislation, operators of domestic cryptocurrency exchanges are also required to register with the FSA to earn a license from the regulator.

“After the amended Payment Services Act took effect on April 1, 2017, only business operators registered with competent Local Finance Bureau are allowed to operate virtual currency exchange service,” the FSA said in its official guidelines  [PDF] last year.

Tightening the Screening Process

Now, the regulator and watchdog has also mandated applicants to submit detailed reports (minutes) of formal board meetings to assess if the company has sufficiently discussed measures to ensure the security of its customers’ assets and its own internal cybersecurity system alongside its financial health.

The FSA will then conduct on-site inspections of these exchange operators to verify the accuracy of those answers submitted in the screening process, the report added.

While the previous 100-point questionnaire predominantly focused on system safety security and the applicant’s financial backing, the agency will now begin looking into records of board meetings as well checking the “composition of an applicant company’s shareholders,” the report added.

Citing sources, the Japan Times also claims that the agency will examine the efficiency of exchanges’ internal systems installed to “check for links to antisocial groups.”

The regulator has narrowed down on the crypto exchange industry following a $530 million cryptocurrency theft from unlicensed Tokyo-based exchange Coincheck in January.

Japan’s financial regulator has been already slapped a number of exchanges with suspensions and improvement orders this year.

Notably, the FSA issued ‘business improvement orders’ to six licensed cryptocurrency exchanges following on-site inspections wherein the regulator determined some of Japan’s largest exchanges were lacking robust management systems and anti-money laundering measures.

As reported by CCN.com in early July, the FSA is also considering a revision of its crypto-regulations altogether by bringing exchanges under the purview of the Financial Instruments and Exchange Act (FIEA). If enacted, crypto exchanges will be required to manage customer funds separately from corporate assets under robust investor protection norms applicable to traditional stock brokerages.

The reported fourfold increase in questions during the screening process comes despite the FSA’s new chief ruling out “excessive” regulations upon the sector less than a fortnight ago.

Featured image from Shutterstock.