Japan’s Financial Services Agency (FSA) is set to implement further regulatory restrictions on domestic cryptocurrency exchanges. According to local media outlets, the financial watchdog is introducing the new measures to prevent another disastrous heist, like the one that destroyed the Coincheck exchange in January 2018. The exchange platform was relieved of more than $500m worth of NEM tokens.

According to the new rules, which are expected to come into effect this summer, every crypto exchange wanting to operate in Japan, will have to officially register with FSA. In addition to providing detailed documentation, the registration process will include preliminary visits from regulators and, perhaps most importantly, exchange operators will have to satisfy five criteria, set by the FSA.

Firstly, the exchange operators will have to ensure that coins are not stored on online wallets as they are notoriously prone to hacking. Two-factor authentication for currency transfers will also become mandatory. Secondly, in order to prevent money laundering, the exchanges will have to develop strict know-your-customer (KYC) policies, featuring customer ID verification for large crypto transfers.

Moving on, the exchanges will be asked to keep customer assets separately from exchange assets and monitor customer account balances daily, scanning for signs of suspicious transfers. The fourth point sadly targets particular digital currencies, specifically those focused on privacy. Anonymity granting cryptocurrencies, such as Monero or Dash, have been prohibited from being listed on exchanges as they are supposedly being often used in funding illicit activities.

Finally, the whole operational structure of the exchanges will have to be changed as the FSA demands it to be similar to the one used in major corporations, with the separation of shareholders from the management team. Such a division is introduced to prevent internal manipulation of company’s assets.

All of the submitted applications to operate a crypto exchange in Japan will be thoroughly reviewed, after which the FSA plans to send its inspectors to the offices of the exchanges where they will assess the situation directly.

In its infancy, the crypto industry saw Japan as one of the hubs where it was allowed to flourish with the country recognizing digital currencies as a valid method of payment. At that time, the Japanese government was putting a strong effort into strengthening the crypto sphere in the country. However, the early days have passed and the country has been tightening the grip on exchanges ever since, with regulations particularly increasing after the Coincheck heist. The focus now seems to have shifted from enhancing the growth of crypto industry towards compliance to regulatory measures.

The tightening rules for crypto exchanges have already forced some of them to seek for pastures new as Kraken announced the halt of its services for Japanese residents, claiming that cost of adhering to new regulations was the main factor behind the decision.

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