The Financial Services Agency (FSA), Japan’s regulatory watchdog, will either give the green light to seven new crypto exchanges to commence operations in the country in the next two months or delay the licenses for a subset of the group. The FSA had instituted new procedures relating to exchange license applications in 2018 to accommodate demand, as well as to ensure that security protocols were a top priority. While seven may seem to be a high number, there are also another 21 applicants still in the early pre-qualification stage.
Japan has always been a hotbed of cryptocurrency trading activity. It is the world leader in Bitcoin usage at the point of sale. Bitcoin’s headquarters is in Japan, and Satoshi Nakamoto, Bitcoin’s creator, also hails from there. Current estimates are that over 3.5 million individuals create over $97 billion in annual trading turnover in crypto exchanges, and they do not seem deterred at all by the recent meltdown in crypto valuations.
The FSA, however, has previously stated that nearly 200 exchange applications had come its way. Back in September, it had announced that it was adding a dozen more employees to deal with the anticipated growth, but it also put in place a rather lengthy two-phase approach, which may have given many companies second thoughts. The FSA’s primary concern is security. The industry has had to absorb a collective loss of $1 billion due to two high-profile compromises – Mt. Gox in 2014, and Coincheck in 2018.
“Phase I” of the application process involves a questionnaire with over 400 questions. After providing answers, the agency then engages the applicant to discuss a variety of issues. Per one report: “The agency communicates with the company to verify its business plan, governance, cybersecurity, management system, and anti-money laundering (AML) and counter-terrorist financing. In this phase of the review, the agency’s officers will personally verify the company’s practices in person.”
These reviews require roughly four months to complete, before the next phase begins in which the official application is submitted, whereupon the FSA has two months to make its decision. Seven companies have graduated to this stage in the process, such that operations could start for any one of them in the next two months.
Why the need for so many exchanges? On a per-capita basis, Japan is one of the leading nations in the world when it comes to the percentage of savings to income ratio. Japanese households have tended to be conservative in the past, dealing mainly in government bonds, but the desire to experiment in the crypto space has grown immensely over the past few years. The majority of these traders are said to be Japanese businessmen around the age of 30.
Another reason may be that the FSA has taken the high road when it comes to cryptocurrencies by sanctioning self-regulation. In October of last year, Reuters reported:
The Japanese financial regulatory body, FSA, has granted the Japan Virtual Currency Exchange Association (JVCEA), the power to monitor and sanction digital currency exchanges. Part of the JVCEA’s regulatory functions includes laying down rules that protect investors’ funds and ensuring compliance among exchanges.
As regulators crack down on exchanges in South Korea and other Asian locales, many exchanges have contemplated a move to Japan. There is one exception. Back in April, Kraken, a large California-based crypto exchange, decided to terminate trading services for Japanese citizens, as of June. The U.S. exchange stated that rising costs was the cause, but that it might also reconsider a return at a future date.