Japan’s Financial Services Agency has ordered two cryptocurrency exchanges — Bitstation and FSHO — to stop doing business for a month. Five others, including Coincheck, were instructed to improve internal controls and report back to the regulator.
The action follows an investigation into digital currency exchanges that found poor compliance with anti-money laundering standards, badly trained staff and “misappropriated” cryptocurrencies. The probe followed a $500m theft, in January, at Coincheck, one of the largest operators.
The crackdown is likely to prompt a shake-up in Japan’s booming market for cryptocurrency trading as weaker exchanges go out of business or team up with larger, better-organised competitors.
Financial companies often struggle to bounce back from a business suspension order, making it a potent regulatory punishment.
It also raises questions about the quality of the FSA’s original regulatory scrutiny of the 32 cryptocurrency exchanges in Japan. Sixteen are operating with full licences and a further 16, including Coincheck, rely on provisional authorisation to trade.
Although the FSA’s on-site inspections are not complete, it has found cases where exchanges did not follow anti-money laundering rules or had inadequate internal controls.
At Nagoya-based Bitstation, a company official “misappropriated user cryptocurrencies for private use”, said the FSA. It ordered Bitstation to halt its business until April 7 and report on improvements to its handling of user funds.
At FSHO, based in Yokohama, the regulator said staff were inadequately trained and did not follow internal procedures. “There were repeated cases of high-value cryptocurrency trades with no judgment made about the need for notification of a suspicious transaction,” said the regulator.
FSHO was also ordered to suspend trading until April 7 and make the necessary notifications of suspicious transactions.
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Hackers broke into Coincheck’s systems in the early hours of the morning on January 26 and stole about $500m of the cryptocurrency XEM belonging to 260,000 customers.
Coincheck has vowed to repay customers from its own resources but the credibility of that plan is still unclear. The company has restarted yen withdrawals, letting customers with cash on deposit to remove it. However, trading in cryptocurrencies remains suspended until Coincheck improves security.
Japan is one of the only jurisdictions in the world to embrace and regulate cryptocurrency trading. The resulting boom in activity put the country at the heart of a tenfold surge in the price of bitcoin, the leading cryptocurrency, during 2017.
Investors are waiting to see if the FSA’s crackdown spreads from tighter enforcement of the existing rules to changes in the permissive regulatory environment.