Cryptocurrency Framework Needs Update – Japan FSA

On-site inspections revealed a lack of internal controls, inadequate governance and poor business models at exchanges.

Japan’s FSA (Financial Services Agency) is looking to alter its cryptocurrency regulations to check speculative investment and address deficiencies identified at exchanges, according to media reports.

The move follows Japan legalising the use of cryptocurrency as legal tender under the Payment Services Act in April 2017. But the regulator did not foresee the use of cryptocurrency more for investment than as a payment instrument, and thus created a panel of experts in April this year to close the gaps between regulation and actual practice.

Recently completed on-site checks by the FSA have revealed a number of issues at domestic exchanges, including a lack of internal controls, inadequate governance and poor business models. Exchanges have also not kept up with the expansion of transactions, with most exchanges still employing less than 20 staff members, according to the FSA.

The regulator said it will make its complete findings public and use them when admitting new licence applicants. The FSA has not licensed any new exchanges since January’s Coickcheck hack, but says “exchange registration will resume very soon”.

For the moment, the recently-established JVCEA (Japan Virtual Currency Exchange Association) has suggested a limit on margin trading, which would prohibit investors from borrowing more than four times their original deposits. There is currently no limit imposed on margin trading, with some crypto exchanges offering margin facilities up to 25 times deposits, the upper margin limit allowed in forex trading.

Last month it was also rumoured that the FSA was looking to bring cryptocurrency exchanges under the purview of the FIEA (Financial Instruments and Exchange Act). This would subject the industry to the same rules applicable to traditional securities markets, including investor protection and anti-insider trading norms.

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