Business & Finance

Bitcoin Hacks Led to Crypto Exchanges Scrutiny by Japanese Banking Regulators

Japan’s financial regulator, Financial Services Agency (FSA), stepped into the crypto world to keep an eye on the operations of crypto exchanges. The FSA investigated two cryptocurrency exchanges, Fisco Digital Asset Group (FDAG) and Huobi Japan, to ensure that the management system of both companies complied with consumer protection and followed legal compliance.

FSA, operated by the Japanese government, supervises banking, securities and exchanges and insurance sector to maintain stability in Japan’s financial system. FSA is obliged to report every activity to the minister of state for financial services. The agency conducted on-site investigations on both exchanges and apart from checking consumer protection, FSA also examined anti-money laundering systems deployed at the exchanges.

Both exchanges scrutinized by FSA were reported to have undergone several managerial changes previously. In order to check if operations of both exchanges haven’t been affected by the changes, FSA made unscheduled visits to the exchanges. Disclosure of few inadequacies was hinted during inspection but FSA didn’t clarify any specific details. It was reported:

The FSA conducted detailed checks with a view to administrative setup, considering that there are insufficient points in the management systems of the two companies and their efforts to protect customers.

Reportedly, Huobi Group has expanded to over 130 countries with more than three million users. Based in Singapore, the cryptocurrency exchange company offers more than 100 cryptocurrencies to its users. FSA had specifically monitored Huobi Japan’s anti-money laundering system. Amid the investigation, no information was extracted from a Houbi spokesman either. When enquired about inspection, he answered:

I cannot answer anything about the exchange with the FSA and the inspection.

On the other hand, Fisco Digital Asset Group (FDAG), founded in 2017, is associated with companies having businesses related to virtual currencies. Fisco engages in business management of these companies by either owning their shares or showing keen interests in the company.

READ ALSO: Primed for Rebound? Bitcoin Exchange Resumes Operations 7 Months Post Hack

Fisco met success a few days back as the Japanese cryptocurrency exchange, Zaif, started its operations after almost seven months. In the past, Zaif, owned by Tech Bureau, had to shut down after suffering from the loss of cryptocurrencies of about 6.7 million yen worth due to a hack. Back then, in 2018, Fisco took over the ownership of Zaif to first compensate for the loss of people affected by the hack and afterward started generating the profits from the business.

This was another reason that attracted the attention of FSA. Fisco taking over Zaif, along with an increase in the customer base of the company, increased the concerns of FSA. With almost 730,000 users being added to Fisco’s customer base, FSA was motivated to prohibit the same mistake that ruined the interest of people earlier.

Japan was the biggest market for bitcoin in 2017 has been realizing cryptocurrencies and crypto exchanges as legal. Under current regulations, all the exchanges are required to get licensed and approval by FSA before starting operations. Although FSA is trying to protect the consumers by supervising and regulating financial activities of crypto exchanges, security breaches could not be prevented. Apart from Zaif, another exchange, Coincheck, lost about $534 million worth of cryptocurrency to the hacking. FSA guided Coincheck after the incident to develop risk management measures but, from time to time, the need to update or modify regulations hits Japan in the face.

After dealing, learning and understanding cryptocurrencies, Japan is eager to share its knowledge and experience with the world. In an attempt to help other countries with crypto regulations, Japan has revealed its plans to help G20 countries at a summit scheduled for June 2019. Apart from Japan, 19 countries including Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Republic of Korea, Republic of South Africa, Russia, Saudi Arabia, Turkey, UK and USA will be present at the summit. Japan is planning to give a handbook to each country at the summit to guide them on crypto regulations. The handbook will focus on:

In the manual, (1) Necessary measures to protect customer assets (2) Measures against cyber attacks (3) Ways of providing information to customers, etc. I will illustrate the way of regulation etc.

Like France, Japan is now offering a hand to other countries to help them with necessary awareness and methodology needed to deal with cryptocurrencies. While we wait for the responses of other countries, that may or may not accept Japan’s offerings, it will be of interest to see how the incidents of security breaches negate the success and potential of cryptocurrencies in the future.

READ ALSO: Japan to Cure Crypto Exchanges Biggest Dilemma

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Fatir Malik

Electrical engineer by profession, turned into blockchain developer. Fatir contributes regularly with his insights about latest developments in fintech sector. Contact the editor at editor.opinions@blockpublisher.com

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