How Japan Handles Crypto Exchanges Differently

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Artwork: Allie Carl/Axios

Crypto exchanges in Japan have different rules than exchanges in other parts of the world.

Why it matters: FTX Japan, by all reports, has not been short of client funds, and this could be attributed to the stricter laws in place for the operation of exchanges in Japan.

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

This followed one of the other most notorious hacks in crypto history, Mt. Gox, which was also based in Japan. A comparable amount was stolen from this bitcoin exchange alone in 2014.

The legacy of these consumer losses has made it urgent for Japan to create new rules for crypto exchanges, which are stricter than most other countries have done, according to Ananya Kumar of the Atlantic Council, a part of the team behind the organization’s Crypto Regulation Tracker. .

Note: Coincheck was later acquired by the Monex Group for around $33 million and received a license in 2019. Monex is now also interested in FTX Japan.

How it works: Kumar outlined several key rules for these businesses in Japan, including:

Client assets and company assets must be held separately, with assets verified in annual audits. Exchanges must be members of a self-regulatory body recognized by the financial regulator. Investors cannot trade with more than 2X margin on exchanges, which is much lower than elsewhere, the Japan Times reported.

Meanwhile, 95% of all client funds must be held by exchanges in cold wallets. That is, the wallets are not actively connected to the Internet.

5% of client funds can be prepared for withdrawal by holding them in hot wallets, but the exchange must self-insure anything in hot wallets with its own funds in its own cold wallets. In other words, if there was a breach in the hot wallet, the exchange could cover it with its own funds.

What they’re saying: What caused the latest scandal isn’t the crypto technology itself, Mamoru Yanase of Japan’s Financial Services Agency (FSA) told Bloomberg. It’s loose governance, lax internal controls and the absence of regulation and oversight.

The FSA is urging the rest of the world to comply with Japan’s surveillance. “I think Coincheck was a big regulatory moment in Japan that didn’t affect other countries as much,” Kumar said. customers will get all their funds back, according to information from the Japan Times. Not because the assets are not there, but because of unknown legal obligations to the originating company.

The Other Side: Not everyone is enthusiastic about Japanese rules.

They make it more expensive to run an operation there than elsewhere, which could explain why US exchanges Kraken and Coinbase have both recently left the country.

By the numbers: About 30 stock exchanges operate in the country, according to the Financial Services Agency. Some of them may, however, include custodians, which are also subject to the rules.

Quick take: Customers may be better protected in Japan, but it’s also not exactly a hotbed of competitive crypto firms.

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