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Japanese FSA issues business improvement orders and suspension orders to cryptocurrency exchanges

Future research and discussion may result in new legislation

18 July 2019

The Financial Services Agency of Japan ("JFSA") issued business improvement orders to 7 virtual currency exchange business operators (including operators whose application for registration are still pending) and business suspension orders to 2 operators on 8 March 2018 through Local Finance Bureaus. Operators are required to make improvement reports to the JFSA by 22 March 2018 and the duration of the business suspension orders is one month.

After Coincheck was hacked on 26 January 2018, the JFSA required all virtual currency exchange business operators to report on their business and compliance status, and the JFSA found a number of compliance shortcomings by registered virtual currency exchange business operators and operators which are allowed to conduct business while their registration applications are pending.  Issues pointed out are various but mainly customer protection, system risk mitigation measures and anti-money laundering and counter terrorist finance measures.

In April 2017, a revised Fund Settlement Act of Japan came into effect and virtual currency exchange business was added to the list of businesses whose operators require a registration and which is supervised by the JFSA.  The Fund Settlement Act and JFSA imposed compliance requirements for those virtual currency exchange business operators including customer protection, cybersecurity, segregation of customers assets and internal staffing and structures sufficient to comply with regulatory requirements.

The JFSA also announced on 8 March 2018 that (i) 3 applicants to virtual currency exchange business operators withdrew their application and cease their exchange business and (ii) it would set up a study group for virtual currency exchange business and discuss and explore further regulations regarding virtual currency exchange business.  The study group will look into margin transactions of virtual currencies, and ICOs and other cryptocurrency fund raising activities.  Research and discussion in the study group may result in new legislation covering those points.