Japan’s FSA publishes draft report of new cryptocurrency regulations

On December 14, Japan’s Financial Services Agency (FSA) published a draft report outlining the country’s new regulatory framework for cryptocurrencies and initial coin offerings (ICOs).

The report, which was discussed at the agency’s 11th study group meeting, contains recommendations from the previous 10 study group meetings. According to local media, there was no major objection to the proposed measures in the report so the FSA is expected to draft regulations based on its content.

One major area in the report concerns preventing and dealing with hacking incidents. The FSA will require cryptocurrency exchanges to strengthen the “management and maintenance of customer property,” such as the management of private keys.For customer protection, the FSA states that it is necessary for exchanges to have net assets “equal to or more than the amount equivalent to the currency and repayment funds” in the event of a hack. The document also outlines countermeasures against crypto exchanges going bankrupt.

The agency says that it recognizes the rapidly changing technological innovation and sees the importance of collaborating with accredited self-regulatory organizations. For this reason, the FSA urges members to join the certified self-regulatory association and develop systems according to their rules. In October, the Japan Virtual Currency Exchange Association (Jvcea) obtained accreditation from the FSA to be able to legally enforce self-regulatory rules.

According to the document, the FSA deems it appropriate to refuse or cancel the registration of operators that neither join the accredited association and conform to the self-regulation nor establish their own internal systems to comply with the self-regulatory rules.

The FSA has proposed a number of measures for “deemed dealers,” which are companies that have been allowed to operate crypto exchanges while their applications are being reviewed. Firstly, they cannot expand their businesses or list additional coins until they are registered. Moreover, they can neither acquire new customers nor advertise or solicit for the purpose of acquiring new customers. They must also post a notice on their websites about the status of their registration.

Among other measures outlined in the report are restrictions on privacy coin listings, transactions in derivatives, and margin trading.

The report also discusses ICO regulation. The FSA noted that ICOs can be subject to the securities regulation. Depending on their structure, tokens may be subject to regulation by the Financial Instruments and Exchange Act or the Fund Settlement Act. The document also reveals that the FSA finds it appropriate for third-party organizations to establish a framework and examine token issuers’ businesses and financial situations.

In addition, the report addresses crypto custody businesses which do not fall under existing laws. The FSA has proposed measures such as introducing a registration system, maintaining an internal control system, separating the management of exchanges’ and customers’ cryptocurrencies, publishing response policies in case of hacking incidents, and retaining funds for repayment.

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