Cryptocurrency Regulation: Japan's Financial Services Agency Framing Rules For Wallet Services

Japan's financial regulator, the Financial Services Agency, announced plans to regulate cryptocurrency wallet services. In its ninth cryptocurrency study group meeting on Monday, one of the main topics on the agenda was to put forward regulatory measures for cryptocurrency wallet services and proposals on how to implement them.

The likely regulatory measures that were discussed at the meeting included the maintenance of internal control systems, management of cryptocurrencies belonging to the service providers and customers, audits of financial statements, publication of policies in the event of stolen funds in a hack, and maintaining funds to repay customers.

At the meeting, it was discussed the regulations for wallet services would be at par with the international standards for preventing money laundering and terrorism financing set by the Financial Action Task Force (an intergovernmental organization headquartered in Paris), cryptocurrency news website Bitcoin.com reported, citing the meeting document and Japanese news outlet Itmedia.. The FATF standards would be imposed on cryptocurrency exchanges, wallet service providers, and initial coin offering issuers.

A cryptocurrency wallet is used to store public and private keys which can be used to receive or spend cryptocurrency. The plan discussed at the meeting focused on service providers and not software wallet developers or hardware wallet manufacturers, since they do not buy or sell cryptocurrencies.

The framework of the regulation was made after the risks associated with the wallet services was discussed. The risks included wallet failures, funds stolen during cyberattacks, money laundering, and risks shared by cryptocurrency exchanges.

The time period for introducing the new regulation was also discussed at the meeting. During the implementation of such regulations, service providers would not be able to add new businesses, customers, or support new coins. The wallet services providers would also have to post notices regarding their registration status. Those who do not wish to register would have to declare that on their websites and “indicate that the business will be abolished,” according to the meeting document, Bitcoin.com reported.

Japan was the first country to regulate cryptocurrency trading platforms in 2017. High-profile hacks — like Coincheck and Zaif — in terms of the money stolen prompted the FSA to set up rules to safeguard investors' funds and penalize defaulting exchange platforms. In September, the agency published guidelines for new applicants wanting to set up cryptocurrency exchanges in the country.

In October, the FSA gave approval for the country's cryptocurrency industry to regulate itself. The approval gave the Virtual Currency Exchange Dealers Association the rights to set rules to safeguard investor assets, prevent money laundering, and give operational guidelines.

Some people in the crypto community feel that Japan's regulatory perspective is good for the business. In October, Mike Lempres, cryptocurrency exchange Coinbase's chief policy officer — while discussing its plan to expand its offerings and services into the Japanese market — told the Nikkei Asian Review: "The Japanese government is more focused on security. That is good for us. We are… committed to getting it done. It will certainly be in 2019.”