Deadline Looms for Japanese Exchanges as they Struggle With New Compliance Rules

Japan is easily one of the most crypto-friendly countries in the world. The Asian giant has worked significantly to provide an environment where cryptocurrency companies and investors can feel comfortable operating.

Deadline Looms for Japanese Exchanges as they Struggle With New Compliance Rules

However, things haven’t gone so smoothly for many exchanges as the Japanese government is inching closer to imposing a major compliance rule.

Sharing Information With the Chief

Earlier this year, the Financial Services Agency (FSA) - Japan’s financial regulator - requested that virtual asset service providers build a framework where they share critical information about customers. The request came as the FSA works to ensure compliance with the Travel Rule from the Financial Action Task Force (FATF).

The Travel Rule has been hotly contested across the industry. It requires that exchanges, trading platforms, and other virtual asset service providers share information such as client details and transaction records above a threshold with regulators. By complying, the FSA is essentially putting a chokehold on exchanges and their autonomy.

The Japan Virtual Assets and Crypto Assets Exchange Association - a self-regulatory body that governs exchange activities in Japan - is expected to introduce these rules around April 2022. Once implemented, virtual asset providers in Japan will send identifiable information about users amongst themselves as well as with the regulator.

Understandably, regulators would want to get more information about crypto users and their transactions. The idea is that with this, regulators will be better able to curb issues like money laundering and terrorist financing. However, it won’t be easy to implement.

Time for Everyone to Buckle Up

The Travel Rule is especially critical for Japan. As stated earlier, the country is a hotbed for cryptocurrency operations - especially now that China has cracked down on the entire crypto industry. However, its history with compliance isn’t so nice.

Earlier this year, the FATF published an assessment of Japan’s crypto space, noting that the country had insufficient Anti-Money Laundering (AML) and COunter-Terrorist Financing (CTF) policies. The report, which assessed crypto exchanges in Japan, showed that activities in the country’s crypto space still left a great deal to be desired.

In the report, the FATF noted that Japanese mafia members had been using cryptocurrencies to launder proceeds from their criminal activities. The agency also noted that Japanese crypto service providers had been more focused on ensuring customer protection than preventing terrorist financing and money laundering risks. This made it very easy for criminals to move funds from point to point.

The FSA has now increased its compliance expectations from exchanges in response to the assessment. The goal is to build a proper infrastructure where suspicious transactions are flagged, inspected, and curbed if the need arises.

The entire problem with this is that exchanges might not b able to bear the costs of compliance. For one, turning over such data will require significant overhauls to their systems. Also, many exchanges might see customer activity slow down due to the compliance requirements. With the deadline set for 2022, Japanese exchanges are now in a race against time.

The FSA is Also Coming for Stablecoins

Interestingly, rules governing exchange activity aren’t the only development from the Japanese market. Earlier this month, Nikkei - one of the world’s most trusted financial news sources - reported that the FSA will propose additional legislation next year to restrict the issuance of stablecoins to only wire transfer companies and banking institutions.

If the report is true, companies like Tether Limited, which doesn’t operate as a bank in Japan, will be unable to conduct business in the country. Tether Limited oversees the issuance of USDT, and the company is only registered in the British Virgin Islands. If Nikkei is to be believed, the company’s days in Japan are numbered.

It is worth noting that these laws won’t affect everyone. Circle, the company that launched the USDC stablecoin, plans to become a chartered bank in the United States. If it succeeds, it should be able to operate in Japan and launch its stablecoin.

Besides the restriction, Nikkei reported that the FSA also plans to tighten its oversight in areas such as criminal transaction prevention, user identity verification for crypto firms, and transaction reporting for wallet providers and stablecoin issuers.

The move appears to be in a bid to protest Japan’s central bank digital currency (CBDC) interests. The country is in the advanced stages of testing its digital yen, and the FSA is looking towards a possible launch at the end of 2022. Once the digital yen is live, private stablecoins would be its direct competition. If the currency is to work as the FSA desires, stablecoin operations would need to be stifled.

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