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Japan’s Financial Regulator to Introduce New ICO Regulations

The Japanese Financial Services Agency is introducing new, stricter ICO regulation to protect investors.

Japan’s financial regulator is set to introduce new Initial Coin Offering (ICO) regulations to protect investors from fraud, local news outlet Jiji Press reported Dec. 1.

According to “informed” sources cited by Jiji, business operators conducting ICOs will be required to register with Japan’s Financial Services Agency (FSA).

The agency is reportedly planning to submit bills revising financial instruments, exchanges and payment services laws to the ordinary parliamentary session that starts in January.

This action has been undertaken “in view of a number of possibly fraudulent ICO cases abroad” as a way “to limit individuals’ investment in ICOs for better protecting them.”

A study reported by Cointelegraph this July identified 80 percent of the ICOs conducted in 2017 as scams.

As Cointelegraph Japan reported last month, the FSA Study Group on Virtual Currency Exchange industry conducted its tenth meeting to discuss ICOs. The tokens emitted during ICOs where classified into three categories: virtual currencies without issuer, virtual currencies with issuer and tokens with issuers that are also obliged to distribute revenues.

According to the report, the first and second token classifications are subject to settlement regulation such as the Financial Instruments and Exchange Act. The third of ICO tokens is subject to investment regulations like the Financial Instruments and Exchange Act.

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Japanese Regulators Clamp Down On Prospective Crypto Exchanges

Japanese Regulators Introduce New Measures To Protect Consumers

Japan has long been at the forefront of the cryptocurrency/blockchain industry, with innovators and forward-thinkers within the country quickly adopting and developing crypto assets and similar technologies. And although many Japanese citizens see eye-to-eye with cryptocurrencies, regulatory bodies across the country have taken a cautious stance, doing their best to protect consumers from scams, hacks and the like.

As per a report from The Japan Times, a Tokyo-based publication, the country’s Financial Services Agency (FSA) has recently clamped down on one of the most important aspects of this industry — exchanges.

The FSA, which is essentially the Japanese equivalent of the US’ SEC, has tightened the registration process for upcoming crypto exchanges, insiders tell The Japan Times. More specifically, the regulatory body is doing its best to ensure that said exchanges are utilizing the proper risk management and mitigation techniques, methods, and systems. The revised registration screening rules are reportedly an update to Japan’s Payment Services Act, which was instated in April 2017 to protect the average cryptocurrency consumer from financial risk.

Those familiar with the matter noted that the revised act will require each crypto exchange license applicant to answer upwards of 400 questions, or a four-fold increase in potential questions. The Japanese news source elaborated, writing:

The state watchdog has increased the number of questions asked when screening applications to about 400 items, up fourfold, sources said Saturday.

Along with the bolstering of the regulatory questionnaire, the FSA added one more hoop for exchanges to jump through, with the revised act now requiring applicants to submit board meeting minutes. It was noted that via the minutes, the regulatory body intends to certify that there are proper measures in place to “sustain the company’s financial health and ensure the security of its computer system.”

The sources later added that this move to garner these minutes is not only to ensure security, but to also confirm that company executives are legitimately involved in the decision-making process of an exchange’s operations.

The updated screening process will also include a regular review of a crypto exchange’s primary shareholders, to “examine if an internal system is in place to check for links to antisocial groups.”

Unfortunately, analysts expect for this new regulatory move to hamper the development of Japan-based exchanges, as the stricter rules may cause the over 100 prospective exchanges to drop their applications ‘tout suite’.

It is clear that the FSA still has the $538M hack of the Japan-based CoinCheck fresh in their minds, as it is apparent that this move, along with a series of recent regulatory restrictions, is directed at mitigating the future risk of hacks and the subsequent loss of consumer-owned funds.

Regardless, as reported by Ethereum World News last week, Toshihide Endo, a commissioner at the FSA, stated:

We have no intention to curb (the crypto industry) excessively,” he said. “We would like to see it grow under appropriate regulation.

Photo by Alexandre Chambon on Unsplash
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Line To Launch “LINK” Cryptocurrency In Expansion Efforts

Although prices throughout the crypto bucket have (somewhat) kicked the bucket, there are still legacy market firms who seem intrigued and excited at the idea of blockchain-backed assets. One such company is Line, a Japan-based internet-centric firm that has become well-known for its messaging app.

As reported by Ethereum World News, the firm announced an in-house crypto-to-crypto exchange, which goes by the name BitBox. Since its release, the exchange has done well, offering its users with low fees, and support for a variety of cryptos via a minimalistic, yet easy-to-use platform.

In a surprising move, the internet giant has shown interest towards expanding its crypto offerings, recently issuing a press release that highlighted its planned “LINK” cryptocurrency. According to The Verge, Line intends to issue the LINK cryptocurrency not via an ICO, but rather, by giving away tokens to users when they use Line services, products or complete specific requests. It wasn’t specified how exactly the payment scheme would work, but one would assume that all users of Line products have a fair chance of receiving this newly-established cryptocurrency.

This may lead you to ask — “What will these tokens be used for?”

Well, Line intends to allow LINK token holders to purchase stickers, “webtoons,” and other services within the firm’s messaging application, in a move to evidently emulate a sort-of premium or loyalty program/service.

Image Courtesy of Line

Although this may be mundane in and of itself, the Japanese firm noted that also intends to offer LINK trading support in the aforementioned Line-owned BitBox crypto exchange. The token has also been likened to Binance Coin, as LINK can be used in the place of the 0.1% fee charged by BitBox’s trading engine.

The firm intends to distribute 800 million LINK tokens over time while keeping 200 million LINK for itself in reserve, which will cap LINK’s circulating volume at a maximum of one billion tokens. It is important to note that for now, that Japan, undoubtedly one of Line’s most important markets, will be unable to access BitBox or LINK, as the Japanese Financial Services Agency (and other regulatory bodies) have not given the go-ahead for these products just yet. As it stands, users in Japan will get virtual points, which can be traded for the firm’s cryptocurrency in the future.

If this LINK venture succeeds, Line intends to eventually use the blockchain behind the LINK token to host decentralized applications (DApps) that will directly connect with the firm’s messaging app.

Speaking with CNET, Youngsu Ko, CEO of Line’s ‘Tech Plus’ subsidiary, explained the social media giant’s aspirations in the cryptosphere, writing:

“The accelerated development of the crypto economy and blockchain technologies has created a wide range of options for new types of businesses. To keep up with these trends, Line has decided to launch our own cryptocurrency and blockchain network. Line intends to be a pioneer in the blockchain/crypto field, using our status as a global mobile platform and a listed company to take the initiative with the first cryptocurrency.”

Photo by Luca Bravo on Unsplash
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Japan’s Financial Regulator Wants Crypto Industry to ‘Grow Under Appropriate Regulation’

The commissioner of Japan’s financial regulator the Financial Services Agency (FSA) said that the agency wants the cryptocurrency industry to “grow under appropriate regulation,” in an interview with Reuters August 22.

Toshihide Endo, commissioner of Japan’s FSA, told Reuters he sees the agency’s goal for developing the crypto industry as finding a “balance” between consumer protection and technological innovation. The commissioner added:

“We have no intention to curb [the crypto industry] excessively. We would like to see it grow under appropriate regulation.”

In July, the FSA had been considering changing the legal basis for regulating crypto exchanges to oversight by the Financial Instruments and Exchange Act (FIEA), instead of its current legal foundation, the Payment Services Act.

Earlier this month, the FSA published the results of its on-site inspections of a number of cryptocurrency exchange operators, noting that in the inspections it gives “priority to investor protection.”

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G20 Crypto Regulations Could Unleash Real Blockchain Change

Jonathan M. Padilla is a Schwarzman Scholar at Tsinghua University where he wrote the dissertation “New Regulations for the New Economy: A Proposal for the G20 on the Regulation of Cryptocurrency,” from which this article was adapted.

He has advised major e-commerce and natural resource companies on blockchain integration and has a background in government and politics.

In March of this year, G20 central bankers and finance ministers met in Buenos Aires to discuss everything from international trade to investment in global infrastructure. Among the topics covered was the regulation of cryptocurrency, which has attracted the growing attention of government regulators and political actors as blockchain adoption becomes more widespread and cryptocurrency markets gain a broader following.

Since then, the G20 has begun to intensely study ways to de-risk cryptocurrency markets and craft regulation that will not stifle the innovative potential of blockchain. While many entrepreneurs and investors in this space fear that compliance with government will hinder future growth, the reality is that engaged cooperation offers the best possible path toward a potential tipping point that accelerates adoption of blockchain technology by major enterprise-grade users and brings in far greater institutional investors.

With central bankers and finance ministers slated to discuss cryptocurrency this summer in Argentina and with the full G20 to meet in late November, action or inaction here will impact cryptocurrency markets. How the blockchain community chooses to engage between now and then has the potential to set the tone of how governments and entrepreneurs develop a long-term relationship.

As Mark Carney, Governor of the Bank of England and Chair of the G20’s Financial Stability Board, noted in March of 2018, blockchain has “the potential to improve efficiency and inclusiveness of both the financial system and the economy,” but unleashing this potential will require substantial work.

An ideal forum

The G20 was originally formed as a forum for finance ministers and central bank governors after the Asian debt crisis of 1997. It’s since become a body for cooperation among heads of state to address challenging economic issues of the time.

In the wake of the Great Recession, the G20 created the Financial Stability Board to better coordinate prevention of and coherent responses to financial instability. Since its inception, the FSB has been critical to enhancing banking regulations through the Basel Accords, an opt-in transnational framework designed to strengthen the resiliency of global financial systems, and to promoting good economic governance policies.

The G20, along with the FSB, provides the best opportunity for a global regulatory framework as they 1)  convene the most relevant stakeholders and decision makers, 2) can craft a framework that is transnational in scope, and 3) are already studying cryptocurrencies and their impacts to a number of different fields.

Any regulatory framework will require cooperation from heads of government who possess the political power to move legislation and balance domestic considerations, from finance and economic ministers who have the technical ability to craft good policy and execute laws, and from central bankers who have a huge impact on the regulation of commercial banking within their respective states.

Additionally, the G20 can ensure whatever framework does take shape is transnational in nature as issues such as tax evasion, money laundering, and investor protection transcend borders. Such a framework would also minimize the risk posed by regulatory arbitrage to nations where firms can exploit loopholes in order to gain advantages based on geography.

Lastly, with G20 member states and FSB staff already working on these issues, there is attention, focus, and a desire to craft policy that will not stifle innovation.

The agenda

Different nations have taken different approaches to the regulation of cryptocurrencies and related fields. While a comprehensive framework is likely years away, there are a few key points that stand out in crafting a regulatory setup.

The simplest issue that the G20 and FSB can mediate is deciding on a working definition of cryptocurrency. Several nations such as Switzerland through FINMA and Israel through the Israeli Securities Agency have taken steps to do this in a way that classifies cryptocurrency into payment tokens, utility tokens, and security tokens.

Clarity on this front will not be easy but defining cryptocurrency will allow entrepreneurs and investors much firmer ground on which to build projects and governments more guidance on how to regulate.

Accepting that all the information required to regulate does not yet exist is another important point. This thought lends support to the creation of sandboxes like what the U.K.’s Financial Conduct Authority is doing on fintech that will provide both flexibility and capacity to evolve to meet the demands of the industry as it matures.

On exchanges, the leadership shown by Japan, with the Financial Services Agency requiring licenses and working with self-regulating organizations (SROs) to help police the space and mainstream cryptocurrency should be lauded.

Exchanges will be critical to figuring out how banks interact with cryptocurrency and how taxes will eventually be collected. As the value of the cryptocurrency market increases more and more attention to know-your-customer (KYC) and anti-money-laundering (AML) compliance will follow.

Industry impact

Collectively, some of the issues above could be woven together to mirror efforts that G20 has taken on banking regulation. A Zug or Valletta Accords, comparable to Basel, could create an opt-in framework where nations agree on basic tenets for regulating cryptocurrency with active input from the industry.

Increased regulation, however, will not mean that blockchain and cryptocurrency projects die. On the contrary, increased regulation, as long as it is done with the cooperation of industry stakeholders and with the aim of de-risking the broader market, will hasten blockchain adoption by large enterprise users and reassure institutional investors.

Numerous large firms have already begun to explore blockchain applications and potential use cases to streamline costs and gain a competitive advantage with their peers. With a regulatory framework in place, the internal and external compliance requirements of publicly traded companies can be met and the true growth stage of the traditional S-curve can begin.

Working with regulators, industry stakeholders can help craft rules where both entrepreneurs and governments win. Such a framework by the G20 could be just the action required to help unleash the long-term creative potential and promise of blockchain.

G20 flag image via Shutterstock.

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Japan's Financial Watchdog Orders AML Shake-Up at 6 Crypto Exchanges

Japan’s financial watchdog has issued business improvement orders to six licensed cryptocurrency exchanges following on-site inspections conducted over recent months.

According to an announcement made by the Financial Services Agency (FSA) on Friday, the regulator is ordering bitFlyer, QUOINE, BTC Box, Bit Bank, Tech Bureau and Bit Point to enhance their internal-auditing and user-protection systems.

As a result, bitFlyer has announced that it has temporarily stopped accepting new customers in order to reexamine the IDs of “certain customers.”

The firm told CoinDesk that “bitFlyer (Japan) is working closely with the FSA and will resume onboarding as soon as possible.”

The exchange has also provided a substantial list of coming improvements to various systems, including user protection, data protection, risk management, new token listing and more, based on the order.

As previously reported by CoinDesk, the FSA launched inspections at licensed platforms in April as part of its increasing scrutiny of domestic exchanges following the $530 million hack on Coincheck earlier this year.

Today’s news confirms suggestions last week that the agency would move to force some exchanges to enhance their anti-money laundering procedures, but, going by the FSA notice, the demands are more wide-ranging.

As a result of the orders, the six exchanges are now required to file a written report to the FSA on the progress of their system improvements by July 23. Until they are able to meet the regulator’s full requirements, the FSA said the exchanges must continue filling additional reports by the 10th of every month.

FSA image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Major Crypto Exchanges Face Action Over Money-Laundering Fears

Japan’s financial watchdog is reportedly planning to force improvements at a number of licensed cryptocurrency exchanges over perceived issues with internal systems, including anti-money laundering (AML) measures.

According to a report from Nikkei on Tuesday, the country’s Financial Service Agency (FSA) intends to ensure full compliance with current AML rules at larger exchanges as their holdings of customer funds rapidly increases. The report suggests at least five exchanges, including bitFlyer, Quoine, and Bitbank, are on the FSA’s list to receive “business improvement orders” this week.

The report said that, based on its recent inspections, the FSA found that some licensed exchanges still do not have sufficient measures in place for spotting suspicious transactions. Further, the agency is also concerned that the firms have not recruited enough staff to cope with the growing volume of transactions on their platforms.

Back in April, the FSA was already raising questions over what it considered a loosely enforced ID-verification process at bitFlyer, after which the firm pledged it would strengthen its procedures.

The agency also issued business improvement orders in March to a number of registered but lesser known cryptocurrency exchanges – including GMO Coin and Tech Bureau – as part of its review of crypto trading platforms following the $530 million Coincheck hack in January.

And, earlier this month, the FSA gave its first-ever license rejection to cryptocurrency exchange FSHO after having issued two suspension orders to the firm over its alleged failure to properly implement security and AML improvements.

The latest move by the FSA comes just days after a Japanese self-regulatory group of cryptocurrency exchanges proposed to strengthen their AML measures by prohibiting member platforms from listing anonymous cryptocurrencies such as monero and dash.

Formed in the aftermath of the Coincheck hack, the Japanese Virtual Currency Exchange Association consists of major exchanges such as bitFlyer, Bitbank and Quoine, and is chaired by Taizen Okuyama, CEO of bitFlyer.

Japanese yen and BTC image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Japan Blasts Crypto Exchange Execs in First-Ever License Rejection

Japan has issued its first official rejection of a cryptocurrency exchange application.

The announcement, released by the Financial Services Agency (FSA) on Thursday, confirms a report yesterday that indicated the regulator would move to reject FSHO’s application – its first such refusal – after it sent two suspension orders to the firm in March and April, respectively.

The denial order further explained that the FSA’s decision was made on the basis that the exchange has made no progress during the past three-month suspension period in terms of improving its internal operations.

FSHO’s operation was halted as the regulator found its know-your-customer (KYC) and security measures were lacking and after the FSA launched an on-site inspection over domestic exchanges following the $500 million Coincheck hack in January.

However, the FSA alleged in today’s notice that a large part of the issue stems from FSHO’s unwillingness to cooperate with government officials.

The FSA claimed that it authorized delegated auditors and lawyers to form a new management team for the company on May 6, a move that came after the second suspension order on April 6.

However, the FSA indicated for issues that are “extremely important in terms of management,” the former management team would still move ahead without obtaining the consent of the newly appointed delegates. In effect, the regulator said the former management had still been in control.

Further, the FSA explained the company’s former management also hosted a general shareholder meeting on June 4 where it decided that the formation of the new management team on May 6 was invalid, while the new team was “virtually absent.”

Subsequently, the delegated lawyers and auditors resigned, according to the regulator.

FSA image via Shutterstock

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Japan to Deny Crypto Exchange Application in Regulatory First

Japan’s financial market regulator is reportedly planning to issue its first ever refusal order to a business registration application filed by a domestic cryptocurrency exchange.

According to a Nikkei report on Tuesday, a trading platform called FSHO will likely see its registration application denied by the Financial Service Agency (FSA) due to its previous failures to comply with existing Japanese financial rules.

As reported by CoinDesk previously, although the FSA has allowed several crypto exchanges including FSHO to operate within the country in the absence of  full regulatory approval, the watchdog issued two suspension orders to the firm in March and April.

The reason for the actions, as explained by the FSA at the time, was that the platform had not implemented strict know-your-customer (KYC) procedures and subsequently failed to report suspicious transactions that might indicate money laundering.

Although the Nikkei report did not indicate when the denial order might be issued, the previous FSA notice indicates that the current suspension order extends until June 7.

“The Financial Services Agency will clarify its attitude towards rebuilding a healthy trading environment by denying a sloppy dealer,” Nikkei said.

The reported FSA action, if true, would seemingly mark a toughening stance by the financial watchdog as it beefs up scrutiny of domestic crypto exchanges following the $530 million Coincheck hack that shocked the industry in January.

FSA image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Japan Was the Wake-Up Call: Get Ready to Defend Privacy Coins

Robert Viglione is the co-founder of ZenCash and a PhD candidate in finance at University of South Carolina. Prior to ZenCash, Rob was a physicist, mercenary mathematician, and U.S. military officer with experience in satellite radar, space launch vehicles, and combat support intelligence.

Crypto enthusiasts, heed this warning: Japanese regulators are veering into the unknown.

A country that once served as a beacon of hope for the development of blockchain-backed initiatives in the region has abruptly changed its stance in recent months, reconsidering the role that cryptocurrencies should be allowed to play in Japan’s commercial ecosystem.

And this is no more apparent than when discussing the current state of privacy coins.

Earlier this week, the Japanese Financial Security Agency (FSA) announced that on June 18, there will be an outright ban on all cryptocurrencies that provide a sufficient degree of anonymity to its end users.

For the most part, Japanese exchanges are listening, pulling four major privacy coins — monero (XMR), dash, Augur’s reputation (REP), and zcash (ZEC) — from their platforms.

As the wider crypto community begins to assess the implications of this decision, it’s becoming increasingly evident that the January hack on Japanese cryptocurrency exchange CoinCheck, which resulted in the theft of 523 million NEM tokens (worth an estimated $524 million), has created a ripple effect that has had repercussions for the future of the space.

To understand the road ahead, I posit that crypto companies — especially those in the privacy space — should consider the advantages, instead of the disadvantages, that privacy coins will provide to the greater community so that they can better advocate for regulatory leniency in both Japan and beyond.

Making the case

Stepping back, if you were to ask any industry expert what the fundamental aspects of cryptocurrencies are, they would likely say immutability, fungibility, decentralization, and confidentiality. At first glance, these attributes may seem incongruous; however, they are all uniquely important to the long-term success of the industry.

For a platform to truly be considered “decentralized,” it must eliminate the possibility of manipulation or control exhibited by centralized entities, which cannot happen without confidentiality. And, as evidenced by the recent incidents at major multinationals Equifax and Facebook, the need to protect one’s identity has never been more top-of-mind.

In fact, at present, there have been an estimated 12,918,657 exposed records thus far in 2018 alone, and that number is only expected to increase. This is why blockchain-based cryptographically secure projects are so necessary — to shield the general public from major multinationals (or hackers) looking to take advantage of their valuable information.

Similarly, for a platform to be considered “immutable,” it must provide unprecedented transparency to the exchange, which cannot effectively occur unless there is an added layer of privacy. Every time a cryptocurrency transaction occurs, a user’s information is viewable to the entire community.

On its surface, it might seem as if most cryptocurrencies — from bitcoin to ethereum — satisfy these criteria. However, as of late, bad actors have found ways to outsmart the system. And once they do so, not only can they connect an individual to one transaction, but they can connect them to their entire crypto history.

It’s becoming an undeniable truth that traditional coins will simply not fit the bill. Exchanges of the future will require more secure platforms that protect users with strong cryptography.

Privacy scapegoated

So where do we go from here? In their assessment of privacy coins, the FSA explicitly stated that a primary justification for its preemptive ban was to eliminate bad actors from being able to conduct criminal activity under the guise of anonymity.

Admittedly, the justification is sound. In the wake of the CoinCheck hack, the presence of anonymity has undoubtedly proven to be an obstacle for authorities looking to find the culprit of the attack.

But don’t be fooled. There are myriad reasons for why this hack occurred in the first place, and none of them are anonymity. If the hack on CoinCheck was a primary justification for the FSA’s decision, then privacy coins were an unfortunate scapegoat.

To ensure a domino effect doesn’t occur in countries around the world, crypto companies should take the initiative and educate regulators about the potential value proposition that privacy coins provide to the blockchain industry.

The FSA decision is one of the first instances where a government entity has questioned the status of privacy coins and their ability to positively impact our commercial ecosystem. It won’t be the last.

By taking precautionary action, companies can quell any misconceptions about the use-cases of the technology, and ensure long-term sustainability of the space for years to come.

Teamwork image via Shutterstock.

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.