Cryptocurrency exchanges seeking to register with Japan’s Financial Services Agency (FSA) will face increased scrutiny, according to a Sunday report from Nikkei Asian Review. The FSA’s tighter review standards are part of a government effort to stave off future heists like the January hack of the Coincheck exchange through early identification of potential risks.
Japan has generally promoted a welcoming environment for the cryptocurrency industry in recent years. The country’s government formally recognized digital currencies as legally acceptable form of payment in 2017, and regulation has been relatively accommodating.
The Coincheck hack, however, may have forced regulators to toughen their approach. One FSA official suggested as much in April: “We need to introduce a new perspective in reviews of registrations.”
The new standards will require exchanges to meet five criteria. Operators will need to prove that they have tightened their system management processes by storing cryptocurrency in offline computers and utilize multiple passwords for all currency transactions. They will also be required to improve their know-your-customer efforts to guard against money laundering.
Customer asset protections will need to be improved as well. The rules require exchanges to conduct balance checks on customer accounts several times each day and implement policies to prevent exchange officers from using customer funds.
The FSA will require those exchanges to be more selective in the types of digital currencies that they list. To obtain government approval, exchange operators will need to avoid listing any cryptocurrencies that are designed to maintain strict anonymity.
Finally, new internal regulations will need to be implemented. Exchanges will be required to maintain separation between management and shareholders. They will also have to protect against potential manipulation of their systems by separating asset management and system development roles.
According to one source at the FSA, the new regulatory rules will improve the agency’s ability to evaluate exchanges and better identify risks. That source acknowledged that the FSA is still struggling to determine the best approach for regulating the nascent industry:
"Without the necessary know-how, we've been feeling our way through the dark on how thoroughly we should check these different aspects."
The agency plans to begin that assessment process with a thorough document review, followed by visits from inspectors who will evaluate each exchange’s systems. Nikkei reports that the FSA plans to begin using their new requirements as soon as the agency starts to accept new registrations. Exchanges that have already received approval will also need to comply with the requirements.