Japan – the first nation that regulated Bitcoin and other cryptocurrencies in the very same manner as its domestic financial services industry, has been looking to step up consumer protections for some time now. One of the nation’s key targets in this respect is to further bolster its anti-money laundering (AML) and know-your-customer (KYC) controls.
With this being said, the Japanese Financial Services Authority (FSA) – the organization responsible for regulating the Japanese finance industry, dictate that cryptocurrency exchanges operating in the country must be in receipt of a full license.
Since the declaration, and according to CoinTelegraph, the FSA has since received more than 190 individual applications, subsequently resulting in an every-growing administrative backlog.
Japan Recognizing That it Must get Cryptocurrency Regulation Right
Japan is often regarded as one of the most crypto-friendly nations in the world. Not only are cryptocurrencies legally regarded in the same light as its domestic currency – the Yen, but the jurisdiction is also responsible for the largest volume of daily Bitcoin trading. Furthermore, it is now possible to physically spend Bitcoin in more than 200,000 real-world stores, with the number growing on a month-by-month basis.
However, at the other end of the spectrum, Japan has also been home to some of the largest cryptocurrency and blockchain asset scandals of all time. First and foremost, it was Japan that provided a home to the infamous M.T. Gox exchange, which at its height, was responsible for more than 70% of all Bitcoin transactional activity.
And then back in January 2018, Japanese-based cryptocurrency exchange Coincheck was accustomed to a wide-spread hack, which resulted in more than $532 million worth of NEM tokens being stolen. Although the exchange has vowed to pay each and every investor back, it once again puts a dim light on the credentials of crypto-related organizations operating in the country.
Other examples are beyond the remit of this article, however it is important to note that they do exist. Therefore, it comes as no surprise that the FSA are looking to stamp-down, or at least significantly reduce, the amount of cryptocurrency-related scandals arising in the country.
Japanese Authorities Demand Reporting of Suspicious Activity
One of the main requirements that Japanese authorities are looking for in a cryptocurrency exchange license application is that the platform in question has installed a stringent AML and KYC program to ensure that financial crime is kept at bay. This includes an expectation for exchanges to submit a suspicious activity report (SAR) when the platform has reasonable grounds to believe that money laundering offences have been attempted by a user.
SARs are an AML tool used by the vast majority of global states, and they allow financial intelligence units to further investigate potential breaches of domestic regulations linked to money laundering and terrorist financing. In the 9 months between January and October 2018, the FSA received more than 5,944 reports linked to potential illicit usage of cryptocurrencies.
Reports of Suspicious Crypto-Related Activity on the Rise in Japan
This number is even more significant when one compares it to the 669 received in 2017. However, much like in the financial services industry, it is important to note that organizations often submit ‘Defensive SARs’ with the aim of protecting themselves in the event that money laundering abuse has in fact taken place. Rather than risk prosecution for non-reporting further down the line, it is believed that organizations submit a SAR just in case.
This can at times be counter-intuitive, insofar that it creates a significant back-log for financial intelligence units, as each and every SAR must be individually investigated, subsequently putting a strain on resources.
Ultimately, much like in the case of the submission of SARs, it appears that the Japanese FSA are also becoming overwhelmed with the number of outstanding exchange license applications.