Regulatory Front – Japan’s FSA all for self-regulation route

  • By Tom Cleveland

  • October 24, 2018
  • 6:07 pm BST

In breaking news, Reuters reported that “The Japanese financial regulatory body, FSA, has granted the Japan Virtual Currency Exchange Association (JVCEA), the power to monitor and sanction digital currency exchanges. Part of the JVCEA’s regulatory functions includes laying down rules that protect investors’ funds and ensuring compliance among exchanges.” Cryptocurrencies are extremely popular in Japan, a measure of that popularity being that there are 160 applications in the pipeline for new exchange licenses to support domestic consumer demand.

The JVCEA actually requested that the FSA consider granting it self-regulatory powers in this arena late last year. An official of the FSA noted that the cryptocurrency industry is moving at a fast pace, such that operating standards for exchanges should more appropriately be made by industry participants, rather than by bureaucrats. The JVCEA has also established a reputation for developing stiffer rules that are presently on the books, a good sign if the industry is to rebuild the public trust after high-profile thefts from a few exchanges by organized crime.

The news has been rife with several highly publicized compromises of Japanese crypto exchanges. Coincheck was a major target for organized hackers, who stole NEM tokens valued at a staggering figure of $523 million. In another incident, the Zaif exchange was robbed of a variety of coins for a much lesser amount, but about $50 million just the same. Asian exchanges have suffered more attacks than their Western brethren. Many reasons have been cited, the major one being lax security protocols and firewalls.

The FSA will continue to tighten its regulatory regimen, as well, but the initial focus will be to shore up the nation’s exchange providers. Hacking compromises have been occurring at an alarming rate and must be contained, as soon as possible. The JVCEA has work to do to implement tighter standards, oversee compliance, and come down hard on non-complying firms.

The FSA also announced that it had published guidelines for those new entities wishing to enter the exchange business model. It had already implemented new regulations designed to “safeguard customers’ funds and sanction defaulting exchange platforms.” Aside from exchanges, the FSA communicated that it would also review the expanding Initial Coin Offering sector with the intent of enforcing stricter rules on speculative investments in cryptocurrencies. Unsuspecting consumers that are not fully informed of the risks involved in these investments require adequate risk disclosures.

The self-regulation path may be well suited for Japan since an industry oversight group already exists and has been active, but Japan and its FSA have chosen a route that is untested in other markets. Regulators in other jurisdictions have been more prone to act on their own while seeking clarification of current laws on the books from local lawmakers. The consensus approach, however, is alive and well in Japan. Time will tell if this course bears fruit.