Will Japan's Revamped Cryptocurrency Regulations Solve the Hacking Problem?

David Drake

Investors play an important role in growing the cryptocurrency industry and mainstream adoption of virtual currencies and blockchain technology. It is for this reason that Japan’s financial service agency (FSA) announced additional regulation measures as part of the new screening process for registration of cryptocurrency exchanges.
Japan’s new move comes at a time when blockchain backed solutions are being built across the globe. Some interesting solutions include family smart contracts platform, URAllowance and mortgage lending, digital coupon marketplace, Qupon and investing platform for mortgage backed securities, HFC Coin. Others are social media security platform, ONe Network, interactive marketing platform, Noiz Chain and portfolio optimization platform, Live Tradr.

New Regulations
Japan has been one of the major players in the global cryptocurrency space. However, its history has been stained by two big data breaches that hit Mt. Gox and Coincheck cryptocurrency trading platforms. To address this problem, Japan’s FSA holds that the new measures will ensure that the industry grows under suitable regulations.
Under the new regulations, cryptocurrency platforms in Japan will have to provide answers to 400 items, up from 100. New cryptocurrency exchange applicants will also be required to submit executive board meeting records to ascertain that sufficient enquiries have been made to guarantee the financial strength of the exchange and the security of its computer systems.
Japan’s FSA representatives will also conduct onsite investigations to validate responses provided in the registration process. Crypto exchanges that pass these new regulatory requirements will also be subject to systematic monitoring to ensure that their systems are able to detect hostile links that pose a risk to customer privacy and investments.

Reducing Breaches
The FSA hopes that the new strict regulatory environment will help tackle any potential hacking instances in Japanese cryptocurrency exchanges. This view is also held by Jack Bensimon, Chief compliance officer at Blockvest, who lauds the efforts in the wake of customer concerns on the likelihood of tokens being stolen by outsiders.
He says, “Japan is unequivocally leading the charge in crypto exchange regulation by establishing firm and strict rules for all stakeholders in the exchange ecosystem – liquidity providers, third-party vendors, market makers, algo providers, and others. Nearly 60% of all crypto trading is in Japan.”
Noting that the new regulations will validate the industry to potential users, Bensimon further says, “This is clearly a market that views regulation as crypto validation and a way to centralize controls for decentralized digital assets. Regulation provides exchanges with strict standards around the cold storage of tokens, for example. Customers that trade crypto are increasingly concerned about the likelihood of tokens being stolen by outsiders for which they have no control over.”
On his part, Raghav Reggie Jerath, CEO at Gath3r, highlights other measures that the FSA needs to undertake to address financial and technological breaches.
He says, “The measures, taken by the FSA of Japan, would help in reducing breaches from a broader perspective. However, to lower the risk of external leaks and intrusion attempts, the FSA should be conducting random audits via third-party auditors of the underlying technology which should include penetration testing of the system as a whole. Due to the infancy of the industry, breaches on both the financial side and technological side can be expected and the actions taken by the FSA need to address both financial protections, while also delving deeper into the technological side.”
Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.