Tokyo FinTech
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Tokyo FinTech

Japan FSA 5th Study Group on Virtual Currency Exchanges

The Japan FSA’s 5th “Study Group on Virtual Currency Exchanges” took place on September 12, 2018.

Unlike the previous date, no international speakers were invited, and the agenda consisted of updates from the secretariat, as well as from the Japan Virtual Currency Exchange Association, the self-regulatory organization (SRO).

General discussion topics

Basic view points in institutional correspondence

  • When thinking about what kind of rules to make, we will consider a broad perspective on how we would like to go about virtual currency, ICO, or blockchain technology in Japan
  • In the discussion, virtual currencies and blockchain technology should be clearly distinguished from each other
  • With regard to virtual currencies and blockchain technology, we can contribute to the creation of communities in the form of local currency, we can cut costs in the area of ​​information sharing, ICOs can raise risk capital; regulations also need to consider the good aspects of these technologies
  • In the current situation, although it is common to evaluate that virtual currencies have larger risk, and blockchain technology has more upside, it is not necessarily appropriate to decide on what will happen in the future
  • At the time of the Coincheck incident, there was an opinion that people are responsible for themselves, but many of the people who are engaged in transactions are those who can not actually protect themselves. Given that there are situations where many people without sufficient knowledge can trade, it may not be done with self-responsibility
  • Virtual currency regulations are being strengthened globally as “items requiring attention”, and in Japan it may not be necessary to think about regulation, but rather to train the industry appropriately
  • As for the virtual currency, it is the impression that various problems are occurring at the same time, but how to cope with and how to cope with each problem type will change, so first of all we have to organize the problem type and consider each type
  • It may be necessary to consider ways of regulation based on the risks and characteristics according to the functions that virtual currencies and ICOs play
  • Transactions are carried out across national borders, so it seems that there are some difficult aspects of enforcement, but regulation is necessary and enforcement is difficult, as the legal level is different by country, so we need to think about it
  • Existing rules should be adhered to first, rather than creating new rules
  • Even if rules are set to some extent, there are parts that cannot be regulated in detail, so there is a need for a the industry group to do their best by defining principles

Opinions on the current system

  • It seems that the current law is mainly developing the system with the virtual currency settlement function in mind, but may not be enough as a legal regulation when the virtual currency is used for investment / speculation
  • It may be necessary to review the regulations on virtual currency, including the viewpoint of investor protection
  • Virtual currencies are not subject to the financial product sales law, which should be reviewed

Opinions on self-regulation

  • How to share the rules with voluntary regulatory bodies will be important in the future
  • Keeping in mind that we take self-regulation in a manner that guarantees transparency while taking in external viewpoints, distribute it to the trader / industry as a whole, constantly review it based on technological developments, etc., it is necessary to increase the effectiveness of the public-private partnership
  • It may be necessary for self-regulatory organizations to have a complaint window set up, analyze any filings, and take swift countermeasures as appropriate

Opinions on international collaboration

  • In the future, international cooperation is indispensable in rule making and enforcement
  • It is very important to positively communicate internationally and share lessons learned in Japan and the established regulatory framework

Opinions on risk management

  • As there is no lending etc. done so far, we do not have to think much about systemic risk at the present moment
  • At this point it is unlikely that it will lead to systemic risk on a scale, but taking into consideration that leverage and volatility are large, there is a need to watch carefully future movements, such as when there is a big event

Specific discussion topics

Opinions on virtual currency exchanges

  • The roles played by exchanges are diverse and it is important to be aware that different risks may exist depending on various aspects such as storage, trading and market making
  • Should promptly improve the level of security as an industry, including minimum “safety standards”
  • A focus on a rules-based approach to enforcing such minimum standards might be necessary, and it needs to be applied to malicious cases, thereby increasing the deterrence and encouraging public awareness

Management of customer assets

  • It may become important to preserve customer assets from the risk of bankruptcy of the exchange in some way
  • Should the trust bank model be applied to virtual currency exchanges?
  • Is not there a need for regulations targeting companies that assess asset values?
  • Will it be enough to remove deposits from the virtual currency exchanges and enforce separation of functions?
  • Loss of virtual currency due to hacking or the like can happen even at a provider who only provides a wallet, and is it necessary to deal with user protection

Entry & disclosure regulation

  • Is the entry regulation a little loose? For example, although the capital requirements are low, once a loss occurs, it may be in the JPY billions or tens of billions, so that it cannot be covered with capital only
  • From the viewpoint of reducing the risk of virtual currency and promoting development in the appropriate direction, is not it necessary to strengthen control by market and regulation including entry control?
  • Will it be necessary to rethink the idea of solicitation for advertisements and general people in the direction of regulation?
  • It may be necessary to think about how to disclose information focused on the premise that the variety of virtual currencies has increased

Virtual currencies

  • Whether registrants can handle privacy coins can be subject to discussion
  • For virtual currencies that can not be adequately recognized, for example, it may be considered not to allow companies to register under the entry regulation, or to not allow sales to general investors in the regulation

Opinions concerning dealers in the application process

  • For dealers in the application process (so called “deemed dealers), it is better to set the deadline for registration
  • There may be a way of thinking about improving and strengthening operation and supervision with regard to deemed dealers under current regulations

Opinions on unregistered dealers

  • Regarding unregistered traders, it seems that some problems can not be solved by user’s own responsibility alone, so it may be necessary to consider a regulatory response
  • Shouldn’t regulations in principle invalidate trading by unregistered traders, or strengthening prohibition / suspension orders and penalties by the court?

Opinions concerning money laundering

  • With the ongoing suspicion of money laundering and privacy coins being issued, there is regulation on strict money laundering even in fiat currencies, so maybe we need to think in the same way
  • Will it be necessary to consider whether the business condition that only deposits or relocates the virtual currency should be subject to regulation of the criminal profit transfer prevention law?

Opinions on improper transactions

  • It is doubtful whether the provisions of the Financial Instruments and Exchange Act can be applied directly, but since we can not afford to leave insider information unregulated, we may need to think about effective regulation

Opinions on margin trading

  • In the statistics, 80% of transactions are executed on margin, and there is no doubt that there is a debate as to whether such circumstances should be tolerated
  • For margin trading in virtual currencies, maybe we need to confirm the basis for accepting social equivalence

Opinions on ICOs

  • Whether to use tokens or to use money or securities, if the economic functions and risks are the same, it seems that it is basically necessary to apply similar regulations; so in the new legal framework, it is important to determine the function and risk
  • Despite the fact that the token itself is of no value, neglecting the current situation of selling at a high price in the secondary market can make the problem more serious and complicated, and problems of investor protection may cause a bigger effect
  • Is it not it important whether the token’s secondary market can be made reasonable by some regulation?
  • Is an urgent response to ICOs necessary? Especially consumer protection seems to be the focus, what kind of approach is required, what degree of strict regulations are imposed; therefore, it may be necessary to narrow down the issues and discuss them to some extent
  • For ICO, it is necessary to carefully consider economic and social rationality from the following two points: 1 — the ICO provides funding for the project, but are the funds not flowing into a fraudulent business plan or fraudulent destination? 2 — for example, traditional shares are related to the real economy such that the business realities of companies are the basis of value, but the valuation of tokens does not necessarily have a substantive basis?
  • For ICOs, should they not be banned at least to general investors?
  • If the ICO is effective as a means of procuring funds for venture companies and the like, whether companies are going abroad or technological development happens in Japan, should this be prohibited?
  • It is considered technically difficult to prohibit overseas ICOs, so maybe we need to think about what type of awareness raising and investor protection is desirable
  • Because tokens have issuers, it will be a question of how to disclose information
  • For ICOs, it may be possible to use it as a means of procuring risk money in some cases, by mandating businesses to disclose detailed information on the white paper
  • Is it really necessary to investigate cases whether ICOs are effective for raising startup funds?

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