Cryptocurrency Regulation

Japan’s Financial Service Agency (FSA), published a new draft report on 14th December’18, framing cryptocurrency regulations. The new regulatory framework includes measures that were previously not addressed such as self-regulation, hacking incidents, privacy coins, deemed dealers, and margin trading.

New Cryptocurrency and ICO Regulatory Framework

On 3rd Dec’18 Japan’s financial regulator was planning to issue new ICO regulations, according to Jiji Press. Japan’s FSA published a regulatory draft for new crypto and Initial Coin Offerings regulations on Friday as reported by Bitcoin.com.

The draft report was discussed at the agency’s (FSA) 11th study group meeting, which contains proposals from the previous 10 study group meetings. According to local media, there were no major objections to the proposed measures in a report.

However, there was one important area in the report which had concerns on preventing and dealing with hacking incidents. Japan this year had witnessed hacks of two major Japanese crypto exchanges Coincheck in Jan and Zaif in Sep.

The FSA will require cryptocurrency exchanges to strengthen the management and maintenance of customer property, like management of private keys. The FSA states that “it is mandatory for exchanges to have net assets equal to or more than the amount equivalent to currency and repayment funds in the event of a hack,” for consumer protection.

The document also outlines countermeasures against cryptocurrency exchanges going bankrupt.

Self-Regulation

The country’s top financial regulator explains that it recognizes rapidly growing technological innovation and identifies the importance of collaborating with accredited self-regulatory organizations. “For this reason, we urge members to join certified (self-regulatory) association” and develop systems in accordance to their rules, the FSA wrote.

Japan’s Virtual Currency Exchange Association (JVCEA)  obtained accreditation from the FSA in October 2018, to be able to enforce self-regulatory rules legally.

JAPAN’s FINANCIAL REGULATORY DRAFTS NEW FRAMEWORK FOR CRYPTOCURRENCY
The document also defines that FSA deems it to be correct to refuse or cancel the registration of operators that neither join accredited association and conform to the self-regulation nor establish their self-internal systems to adhere with self-regulatory rules.

Deemed Dealers

The draft report also addresses ‘deemed dealers,’ which are companies that have been allowed to operate cryptocurrency exchanges while their applications are being analyzed. At present in Japan, there are three companies viz Coincheck, LastRoots, and Bitcoin.

The report also makes a point that some of them have been aggressively advertising and promoting their businesses which are rapidly growing, but many of their customers are not aware that they are not registered.

The FSA has come out with measures for companies. Firstly, companies cannot expand their businesses or list additional coins until they are registered, they can neither acquire new customers nor advertise or promote for the intent of gaining new customers. The companies should also post a notice on their websites about the status of their registration.

Other Measures

Some of the measures outlined in the report are restricting privacy coin listings, transactions in derivatives, and margin trading.

The report also discusses Initial Coin Offering regulation. ICOs “can be subjected to the securities regulation,” FSA noted, it also added that ‘We are implementing administrative measures.’ Depending on the ICO structure, tokens may be subject to regulation by the Financial Instruments and Exchange Act or the Fund Settlement Act.

The document also reveals that financial regulatory finds it appropriate for third-party organizations to establish a framework and examine token issuers’ business interest and economic situations.

The draft report additionally addresses the cryptocurrency custody business which does not fall under existing laws. The FSA has proposed measures such as introducing a registration system, separating the management of exchanges’ and customers’ cryptocurrencies, maintaining an internal control system, publishing response policies in case of hacking incidents, and retaining funds for repayment.

Will Japan’s proposed new financial regulatory framework for crypto and ICO make other countries to adopt the same? Share your thoughts in the comment.