Japan’s Financial Services Agency (FSA) shut down two cryptocurrency exchanges today (March 8), ordering them to suspend operations for a month, as part of a crackdown following the $534 million hack of Coincheck in February.
On the same day, the FSA also issued business improvement orders to five other exchanges, including Coincheck (again), which had already been slapped with a business improvement order in January. This is the first time the FSA has ordered a cryptocurrency exchange to stop operations.
The FSA confirmed that it had ordered two cryptocurrency exchanges, FSHO (Yokohama City) and Bit Station (Nagoya Prefecture), to temporarily halt their operations for a 30-day period starting from March 8.
The FSA noted that FSHO had failed to put in an effective and appropriate system to monitor trading and had not given required training to its employees. Bit Station was suspended after a senior employee allegedly diverted digital currency deposits for his own personal use, showing a serious lack of cybersecurity.
Japan has been hoping to become the cryptocurrency capital of Asia, and perhaps the world. More than 30% of all global bitcoin transactions are conducted in yen, and in April of 2017, the government made Bitcoin legal tender.
In September last year, the FSA started to officially recognize virtual currency exchanges that met their standards, and there are now more than 15 registered virtual currency exchanges in Japan. Korea is also a hub of cryptocurrency activity but tightening regulations there have helped Japan gain ground as a key proponent of virtual currency investment, speculation and trading.
However, on January 26, Coincheck announced that they had been hacked, losing the equivalent of $534 million worth of the cryptocurrency, NEM. The case sent shockwaves through Japan and the cryptocurrency world.
The FSA issued Coincheck with “a business improvement order” just a few days later, on January 29, and ordered a full report on the cause of the hacking and the firm’s plan to pay back customers and prevent further losses by February 13. The FSA even raided the firm. The fact that Coincheck was issued another business improvement order less than a month after the report was submitted does not bode well for the company.
The Coincheck hack was the largest cryptocurrency heist in history. The second largest was also in Japan, in 2014, when $480 million in bitcoin was stolen from Mt. Gox.
It was that fiasco which resulted in Japan eventually issuing new regulations last year, requiring exchanges to obtain the equivalent of a license from the FSA. However, Coincheck — as well as many other exchanges who had been operating before new regulations were introduced — was allowed to continue operating while the agency reviewed their applications.
Thousands of businesses in Japan accept bitcoin, although other alternative currencies have struggled to gain widespread acceptance. bitFlyer, which is now Japan’s main bitcoin exchange, claims more than a million users at present.
The Plus Side Of The Crackdown
The FSA crackdown, while it may spook some aficionados of cryptocurrency, can also be taken as a sign that Japan is hoping to build an environment in which customers feels safe in entrusting their money and virtual money with the exchanges.
J.Maurice, a cryptocurrency expert, specializing in Bitcoin, and the representative director of WIZ K.K. (Tokyo), welcomed the crackdown by the FSA. “We are considering applying for a cryptocurrency exchange license this year so we are following this news with great interest. There was a time when Mark Karpeles, the CEO of Mt.Gox, approached the FSA for advice and they told him to do as he wished since bitcoins were unregulated. Now they [the FSA] are taking steps to make sure that cryptocurrency users are protected.”
He added, “The general public doesn’t buy or sell depending on their confidence in the FSA, but they might choose which exchange to use depending on what the FSA says or does. Would you trust your money to an exchange that the FSA just slapped with a business improvement order?”
He says he’s convinced the steps taken today are ultimately a good thing for Japan’s customers of cryptocurrency exchanges and the cryptocurrency business in general.