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Japan to Cast Wider Crypto Regulatory Net Starting May 1

Japanese regulators are set to tighten restrictions on crypto custodians in the country. Come May 1, it will be enforcement date for the updated Japanese Payment Services Act (PSA) which will bring about more defined regulations and framework for Japanese crypto exchanges and Virtual Assets Service Providers.

The recent PSA update includes a terminology change from “virtual currency” to “crypto asset” which Michael Ou, the Co-founder of CoolBitX, says as simple as it may sound is a crucial move since there remain differences in how regulators define certain activities.

“In this case, regulators are trying to cast a wider net as not every virtual asset would have been defined as a currency—meaning that all crypto exchanges will be impacted because new entities will now fall under the regulation. Additionally, there are no official laws to regulate crypto
in Japan, meaning that amending current regulations is the only option for digital assets to have a legal status.”

CoolBitX is a blockchain security company that provides solutions for a rapidly-changing industry in order to foster the mass adoption of virtual assets. Its two product lines are CoolWallet S, the world’s first mobile hardware wallet and Sygna, the first-in-class attestable end-to-end KYC wallet solution.

There is a notion that cryptocurrency custodians are mainly targeted by regulators to ensure that clear regulations and framework around the custodianship and safekeeping of digital assets are implemented —just like the heavily regulated custodians in traditional finance. This will supposedly help digital assets to gain mainstream adoption.

The revised PSA also states that crypto exchanges operating in Japan will have to manage users’ money separately from their own cash flows — resulting in crypto exchanges’ storing their client’s assets in third-party operating systems using secure methods like cold wallets. For users that insist on using hot wallets, PSA stated that exchanges will be responsible to properly reimburse users in the instance of theft.

Ou, whose CoolBitX launched a pilot program with SBI VC in 2019 to enable their users withdraw assets from their hot wallet to a dedicated KYC cold storage wallet, says:

“While practices vary for each exchange, this will soon be a common practice and we may see new insurance products that will help cater to this issue. While crypto derivatives are largely unregulated and consist of 80% of existing trades in Japan, it will soon fall under the regulation of Financial Instruments and Exchange Act (FIEA). Although this announcement seems sudden, most Japanese exchanges that offer derivatives have been aware of this since last year and have received guidelines by Japan’s Virtual Currency Exchange (JVCEA) — a self-regulatory association officially recognised by the Japan Financial Services Agency (JFSA).”

As seen within traditional finance where derivatives markets are considered a higher-risk market, Ou does not expect the crypto space to be any different hoping that more stringent regulations will be put in place in a matter of time. He said:

“For crypto derivatives to receive mainstream adoption, clear regulations in this arena were necessary. With the implementation of FATF’s guidance across the globe, we foresee a greater acceptance of crypto by more and more traditional institutions. Clear cut regulations have attracted traditional financial institutions to move investments to the crypto market. In Japan, major corporations and financial institutions such as Nomura, SBI, and Rakuten have made significant investments into the national crypto industry—and we foresee that the acceptance of blockchain and crypto will continue to increase as regulations develop.”

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