The Kanto Finance Bureau, a regional branch of the Japanese Ministry of Finance, announced on June 7 that it has rejected a registration application from cryptocurrency exchange quasi-operator FSHO. Although FSHO has received two operation suspension and reform orders from the bureau in the past, this time ‘lack of preparation’ was cited as the reason for the rejection.
This is the first time a cryptocurrency exchange operator has been rejected by a financial regulator in Japan. A quasi-operator is a cryptocurrency exchange operator that is applying for registration, but has not yet been recognized by the Financial Services Agency (FSA) to have adequate internal management controls in place for formal operation.
The Payment Services Act was revised in Japan in April 2017 to stipulate that all companies operating a cryptocurrency exchange must register with the FSA. Up until now, the agency had recognized 16 companies as registered companies. Another 16 were quasi-operators, but a succession of companies have withdrawn their applications and as of June 11, the number of quasi-operators has dwindled to 4.
FSHO applied for registration as a cryptocurrency exchange operator in September 2017. Since February, the FSA has conducted on-site investigations and determined FSHO was not implementing the appropriate checks for transactions with suspected criminal activity.
Things deteriorated in March when the exchange was issued an order to suspend operations for a month. After the suspension, the FSA conducted a second on-site investigation, but determined that FSHO’s procedures showed no signs of improvement and ordered the exchange to suspend operations for a further two months.
During a third investigation in May, the FSA still did not see improvements, citing a problem with the posture of implemented control systems.
Coincheck, which had a massive theft of NEM (XEM) coins from its system in January, is among the four remaining quasi-operators. Coincheck was acquired in April by Monex Group, an online brokerage firm listed in Japan, and the group is planning to restructure Coincheck’s operations. Ten other listed companies have declared their intentions to launch cryptocurrency exchanges, including finance service company SBI Holdings, a Yahoo Japan subsidiary, and Avex Inc., an entertainment business that manages music labels and other content.
As major businesses enter the cryptocurrency market one after another, the growth of Japan’s market is expected to accelerate with the regulating agency’s elimination of inadequately prepared exchange operators through on-site inspections.
In addition, major exchange Coinbase, announced last week that it plans to enter the cryptocurrency market in Japan. Japan’s bitcoin market has a large transaction volume and more foreign companies are expected to register for entry in due course.
About the author
Masayuki Tashiro is the President & CEO of FISCO Digital Asset Group. He has worked as an analyst providing assessments on futures, options, cash equity, and overall market and index movement since 2010 and currently works as an analyst with a focus on cryptocurrencies. He holds a Master of Financial Technical Analysis and is a regular commentator on the Nikkei CNBC television channel, and a frequent contributor to economic magazines such as Forbes Japan.