Merely three days after the Japanese government and local financial authorities requested cryptocurrency exchanges to improve their infrastructures, bitFlyer, the country’s biggest cryptocurrency exchange, has suspended the registration of new accounts to overhaul its Anti-Money Laundering (AML) and Know Your Customer (KYC) system.
Government Finds Flaws in Internal Management Systems
Since earlier this year, the Japanese government and local authorities have continuously cracked down on anonymous cryptocurrencies Monero, Zcash, and Dash, and the usage of digital assets in financing black market operations such as drug trafficking and distribution.
On June 16, the Japanese financial authorities asked the Financial Action Task Force (FATF) to implement unified crypto regulations to oversee digital asset exchanges internationally with the same standard and policies. The intent behind Japan’s call for unified cryptocurrency exchange regulations was in its plans to prevent the usage of anonymous cryptocurrencies.
“It’s nearly impossible for Japan to handle the problem alone. Even if trade is restricted to only domestic transfers or monitoring is enhanced, it’s still not enough to counter money laundering. It would be best if all the group of 20 industrial and emerging nations and regions (G20) would take the same steps toward prevention,” a Japanese Financial Services Agency spokesperson said.
On Tuesday, June 19, the Japanese government disclosed that it has requested five registered and licensed cryptocurrency exchanges in the country including bitFlyer and Quoine to overhaul their internal systems, after discovering severe flaws in the internal management systems of the exchanges that handle money-laundering prevention and transaction monitoring.
“Upon inspections, the agency concluded there were flaws in the exchange operators’ internal management systems, such as measures to prevent money laundering. The FSA intends to hand down the improvement orders by the end of this week,” a local report revealed earlier this week.
On June 22, bitFlyer suspended new account registrations and overhauled its internal management system to fix its AML and KYC processes. Local analysts have stated that the exchange reacted speedily to the demand from the authorities because a previous report released by the Mainichi Shimbun, the oldest newspaper in Japan that disclosed the Yakuza, the country’s biggest crime syndicate with over 100,000 members, claimed hundreds of millions of dollars were laundered through major cryptocurrency exchanges.
In acknowledgment of the sensitivity of the issue and the displeasure of the Japanese FSA towards cryptocurrency exchanges, an agency that has been supportive of the cryptocurrency sector for many years, the exchange responded quickly to the demands of the government and initiated the process of rebuilding its infrastructure.
Coincheck, CoinRail, and Bithumb Hacks
Currently, cryptocurrency exchanges, even major digital asset trading platforms, have no leverage against the government, mostly due to the recent hacking attacks of major platforms such as Coincheck and Bithumb.
While no investors lost their funds in the three attacks, even the $500 million Coincheck NEM breach, the attacks occurred due to holes in the systems of the exchanges which the operators of the platforms had known prior to the attacks.
In the upcoming months, in major markets like Japan, South Korea, and the US, crypto exchanges will cooperate closely with the authorities and take one step further in legitimizing the cryptocurrency sector.
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