Despite the fairly loyal attitude of Japan’s financial regulators to the crypto industry, which has recently been self-regulated, local authorities are continuing to develop new measures to control services that work with digital currencies. During the ninth meeting of the cryptocurrency-dedicated research group of the Financial Services Agency of Japan (FSA), the financial authorities of the country discussed the conditions for creating a legislative framework for monitoring the operation of crypto wallets. The reason for this decision and how it will affect the work of the crypto market in Japan will be discussed in our material.
According to the current law on payment services in Japan, all companies providing digital assets trading services must register as cryptocurrency exchanges and receive an FSA license. Today, there are 16 licensed crypto exchanges in the country. In March of this year, licensed trading platforms merged into the Virtual Currency Exchange Association (JVCEA) to receive the status of a “certified business association in the field of financial settlements.” JVCEA is also responsible for resolving all contentious issues and creating a regulatory framework for monitoring the activities of local crypto exchanges. In October of this year, Japan’s primary financial regulator decided to grant this crypto association a self-regulatory status.
Since crypto wallets do not provide cryptocurrency trading services, but simply manage the assets by transferring them to customers, their activity does not fall under the jurisdiction of either the FSA or the JVCEA. “Crypto wallets are like a bank account where digital currencies are stored. These services, like crypto exchanges, work with huge amounts of cryptocurrencies, but they do not obey the laws or regulators,” as the local publication Itmedia explained the position of the financial authorities. Nevertheless, the FSA understands that the purpose of cryptocurrency wallets is to manage settlements, which means that the country’s leading financial agency needs a set of rules to regulate their activities.
During the meeting of the FSA research group, the focus was on digital asset storage service providers, rather than hardware wallets and software developers, since many wallets exist as code without a manager or company. At the same time, regulators noted the need for the new legal framework to comply with international standards for the prevention of money laundering and the financing of terrorism, which were developed by the Financial Action Task Force (FATF).
Implementation of the Legislative Project
During the meeting, the FSA research team separately considered the risks associated with the use of digital asset storage services. According to the group, first of all, users of these services are faced with cases of loss of funds during cyber attacks, malfunctions of the wallets, and money laundering. In this connection, the list of regulatory measures will include:
Creation of internal control systems;
Management of cryptocurrencies owned by the service provider and its customers;
Audit of financial statements;
Publication of company policy in case of hacking;
Provision of reserve funds to compensate customers for lost funds.
Also, according to the plans of financial regulators in Japan, during the transition to the new rules, cryptocurrency storage services cannot add new service providers, customers, and cryptocurrencies or tokens. Moreover, these services will be required to publish on their official websites the status of their registration with the FSA. Those services that refuse to register will be closed. At the same time, the timeframe for the introduction of the new rules has not been specified.