Japan’s financial regulator is reportedly considering a shakeup of its existing framework of regulating cryptocurrency exchanges to bolster customer protection norms and better secure investor assets.
In April 2017, the Financial Services Agency (FSA) - Japan’s financial regulator and watchdog – enacted legislation that recognized bitcoin as a legal method of payment following a revision of the country’s Payment Services Act. The regulation also mandated cryptocurrency exchange operators with a domestic presence to register with the FSA and earn a license from the regulator.
Over a year later, the regulator is now considering a pivot in its foundation of crypto exchange regulation after determining that current customer protection mechanisms afforded by the Payment Services Act is insufficient, according to a report by local publication Sankei.
Specifically, the FSA is reportedly looking at bringing the cryptocurrency exchange sector under the purview of the Financial Instruments and Exchange Act (FIEA), to recognize and effect laws applicable to traditional securities firms and stock brokerages.
The FIEA mandates that companies regulated under the law are required to manage customer funds separately from corporate assets. Broadly speaking, the FIEA has far more robust investor protection norms, the report suggests, with strict rules to check activity like insider trading.
The report points to January’s infamous $530 million theft of NEM tokens from Tokyo-based cryptocurrency exchange Coincheck as the primary reason for the reported change in regulation.
The ramifications of the biggest cryptocurrency theft of all time has already seen the FSA ramp up its scrutiny into the sector with ‘spot checks’ of exchanges, business suspension orders, outright rejection of a crypto exchange registration application and, most recently, business improvement orders to six licensed cryptocurrency exchanges in the country.
If the proposed shift to regulate cryptocurrency exchanges under the scope of the FEIA occurs, cryptocurrencies will be classified as a ‘financial product’. This, in turn, could lead to cryptocurrencies gaining exposure to mainstream financial markets. Late last year, the Tokyo Financial Exchange – a major Japanese futures exchange – revealed plans to support bitcoin as a financial product by listing the cryptocurrency through a derivatives futures product.
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