Japan Financial Agency Releases Result of Its First Inspection of Cryptocurrency Exchange

The Japanese Financial Service Agency (FSA), in a recent publication, has announced the result of its first on-site inspections of the cryptocurrency exchange market despite the years of existence of the blockchain technology and the cryptocurrency exchange in particular.
The regulatory body, having completed its research, review, and scrutiny of the fast-growing digital currency exchanges, has decided to apply more stringent regulatory actions on new exchanges that might have the hope receiving operating permit to carry out operations in its jurisdiction.
Potential exchanges aiming to register will be made to go through an on-site inspection at a very early stage so that the agency will examine the feasibility of their business models effectively. It was clearly stated in the publication that the agency in its regulatory and oversight capacity:

“We will enrich document and evidence confirmation about the situation of the company’s business plan and the effective internal control system and the situation of the governance system that gives priority to user protection, performing the verification on-site and through hearings.”

The agency also made mention of the fact that its awaiting list of new companies on the queue to get approved amounts into about “hundreds” waiting to get the permit to operate within its jurisdiction.
In a bid to give reasons why the operators’ maintenance of the internal control system has failed, the agency revealed how it has been unable to keep up with the skyrocketing rate of growth in transaction volumes though it could be a little hinged on the revival of the fall in the digital market which occurred last year. Local news outlet, Nikkei, elaborated by stating that:

“The inspection reveals a sloppy reality that the maintenance of the internal control system has not kept up with the rapid expansion of transactions. The risk was not evaluated for each virtual currency…and it was judged that securing necessary personnel for countermeasures such as money laundering was insufficient at multiple vendors.”

The Inspection Result

Judging based on the findings of the Japan FSA, the total crypto asset if domestic exchange sum up to a whopping amount of 792.8 billion yen ($7.1billion) with a staggering potential of six-fold increase in the short space of one year. Though most of the exchanges do not have over 20 officials, this consequently translates to one person handling about 3.3 billion yen ($29.7 million) digital asset in the country.
Out of about 23 that has been reviewed, seven were fully licensed while the rest were acclaimed “deemed dealers” this will enable them to operate in the country despite being under review by the agency. This former have full access to the market while the latter (though has full access), will have to hope for license by the agency after the review. The agency started taking this measures after the hack of Coincheck in January.
The report also highlighted some challenges across varieties of exchanges business models such as internal audits, corporate government, risk management and compliance are described to be in shambles. The agency also expressed certain concerns about the inadequacy or inefficiency of the Anti-money Laundering (AML) regulations in certain exchanges if the digital world.

The FSA Registration

There has been speculation as to whether or not the agency intends to resume the registration following the interim publication of the Agency, though the certification of exchange platforms has technically stopped after early January’s $532 million hack of crypto exchange.
The confronted the speculation by stating that “substantially” review is going on regarding registration process which it considers as necessary. Also, the agency vows to continue in its effort to grant “priority to investors’ protection.”
Earlier this year, the Financial Service Authority announced regulatory precisions for already registered exchanges, these regulations include stringent restrictions on the trading anonymity-oriented Altcoins in the crypto market.
Also, we witnessed in July, an announcement made by the agency which indicates that it has been considering a change in its legal structure of recent especially for its cryptocurrency regulations. This is preceded by the agency’s restructuring to perform its oversight function effectively and to have a full grasp of a Fintech-related financial sector of the country which is predominated by the cryptocurrency market.
In March 2018, a self-regulated body in the country named Japan Digital Currency Exchange Association (JUCEA) was formed in order to establish, develop and coordinate certain regulations in conjunction with the FSA. The self-regulated body recently announced that it would be placing a barrier to volumes of trade that members can carry out within a specific market period.
However, the agency has added some additional policies to its policy recommendations. According to the FSA: “voluntary regulatory organizations are required to establish an effective internal control system.” This will further translate into some sort of check or scrutiny into the self-regulated bodies.
The FSA will, through this measure, ensure that those self-regulated bodies do not constitute “an uncheckable checker” and would also restore FSA’s legitimacy as the apex financial watchdog in the country.

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