The Japanese Financial Services Agency (FSA) is due to impose strict standards on cryptocurrency exchanges seeking to register in the country. The sudden collapse of Mt. Gox, bankruptcy filing, and subsequent accusations levied against former CEO Mark Karpeles of embezzlement and fraud gave cryptocurrency investors a wake-up call: exchanges are not necessarily safe havens.
Since 2014, numerous cryptocurrency trading posts have become victims of cyberattacks, have experienced data breaches, and some exchanges have been nothing more than exit scams which duped investors out of cryptocurrency. Others have shown every intention of doing right by their investors but poor internal security standards and checks have led to cryptocurrency thefts. One recent case in this category is Coincheck, which suffered a debilitating cyberattack due to poor security standards.
The strict standards for system management, includes the use of cold wallets rather than hot wallets. In other words, investor funds must be stored away from Internet-connected systems. Exchanges must also show that they take money laundering seriously through verification protocols and customer accounts must be monitored on a daily basis for signs of suspicious activity. Executives at the exchanges will also be under the FSA’s watchful eye with new rules set in place to prevent them from using client money or cryptocurrency for their own purposes or investments.
Exchanges that allow “high levels of anonymity” will be banned at the government level due to the increased risk of money laundering and abuse. The regulator will require internal standards already imposed on the creation of traditional companies, such as the separation of shareholders from management. The new rules are likely to come into force during summer. The Coincheck fiasco was a wake-up call in light of the ‘Wild West’ that the cryptocurrency industry has become. Decentralization was always at the heart of virtual assets, but the slow imposition of government regulation, tax, and identity checks worldwide should be a surprise to few.