A bill to amend the Japanese laws regulating cryptocurrency exchange businesses or financial instruments transactions, including the Act on Settlement of Funds (Settlement Act) and the Financial Instruments and Exchange Act (FIEA), was submitted to the Diet on March 15, 2019. The bill proposes to call cryptocurrencies “Crypto Assets” (CA) rather than “Virtual Currencies” (VC) and intends to introduce additional regulations to ensure user protection, regulate derivatives trades on cryptocurrencies, and establish a more transparent regulatory framework on cryptocurrencies.

In response to increasing international demand for robust Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) compliance measures, Japan’s registration regime for virtual currencies exchange businesses (VC Exchange Business) was implemented by amendment of the Settlement Act in April 2017. The regulators examined each applicant’s internal control and compliance systems, including customer intake process and trade monitoring, financial strength, and measures for safe custody of customer assets, including the safe management of trading system, measures against cyberattacks or segregation of customers’ assets, etc., before granting registration as a VC Exchange Business operator (VC Exchanger).

However, in 2018, a couple of Japanese VC Exchangers, Coincheck (during the application review process) and Tech Bureau/Zaif (after formal registration was completed), suffered hacks and lost their users’ and their own cryptocurrencies valued at approximately 58 billion yen ($518 million) and 7 billion yen ($63 million), respectively. Although user number had increased and the business of VC Exchangers had expanded rapidly, internal control and compliance systems were inadequate to conduct the VC Exchange Business with sufficient protection for user interests/assets.

Furthermore, cryptocurrencies became a tool of speculation for individual traders with margin trading of highly leveraged cryptocurrencies. Although new types of transactions with cryptocurrencies, such as margin trading, initial coin offerings, or security token offerings, were developed and growing, they remained unregulated, with rules and regulations applicable to these new transactions unclear.

Given the above challenges, the bill was submitted to enhance user protection and articulate applicable rules and regulations by streamlining the regulatory framework on cryptocurrencies.

Click here for the full GT Alert, which examines the major amendments and newly employed provisions of the Settlement Act and the FIEA.