Differences in how Japanese virtual currency exchanges are handled

Japanese cryptocurrency exchanges have different rules than exchanges in other parts of the world.

Important reasons: By all reports, FTX Japan was never short of customer funds.

Flashback: In 2018, Japanese crypto exchange Coincheck stole hundreds of millions of dollars worth of cryptocurrency NEM.

• It follows one of the most notorious hacks in cryptocurrency history, Mt. Gox, which was also based in Japan. A similar amount was stolen from a Bitcoin-only exchange in 2014.

Legacy of those consumer losses According to Ananya Kumar of the Atlantic Council, who is part of the team behind the organization’s Crypto Regulation Tracker, Japan is in urgent need of creating new rules for its crypto exchanges that are stricter than what most other countries have done. became.

• Note: Coincheck was later acquired by Monex Group for approximately $33 million and licensed in 2019. Monex is also currently interested in FTX Japan.

Usage: Mr. Kumar emphasized some important rules regarding such business in Japan.

• Client assets and company assets must be kept separate and holdings are verified in annual audits.
• Exchanges must be members of self-regulatory organizations recognized by financial regulators.
• Investors can’t trade at more than double the margin on the exchange, which is significantly lower than elsewhere, The Japan Times reports.

in the meantime, 95% of all customer funds must be held in cold wallets by the exchange. That is, wallets that are not actively connected to the internet.

• 5% of the customer’s funds can be kept in hot wallets ready for withdrawal, while the exchange self-guarantees everything in hot wallets with its own funds in its own cold wallets. need to do it.
• In other words, if there is a breach of the hot wallet, the exchange can compensate it with its own funds.

What they say: “It is not cryptography per se that has led to the recent scandals,” Mamoru Yanase of Japan’s Financial Services Agency (FSA) told Bloomberg. “Weak governance, lax internal controls, lack of regulation and oversight.”

• The Financial Services Agency is urging the world to adjust to Japan’s oversight.
• “Coincheck was a big regulatory moment in Japan, and I don’t think it had as much of an impact on other countries.
• note: There are still some concerns over whether FTX Japan customers will get all their funds back, according to a Japan Times report. am.

Opposite side: Not everyone is enthusiastic about Japanese rules.

• That may be why both US exchanges Kraken and Coinbase recently pulled out of the country.

By numbers: According to the Financial Services Agency, there are about 30 exchanges operating in Japan. However, some of them may include custodians subject to the rules.

Quick take: Customers may be more protected in Japan, but it is not a hotbed for competitive cryptocurrency companies.