The FSA starts to consider bringing cryptocurrency regulations under the Financial Instruments and Exchange Act

According to media reports, on July 3, the Financial Services Agency of Japan (the “FSA”) started to consider changing the law regulating cryptocurrency exchange operators in Japan from the amended Payment Services Act to the Financial Instruments and Exchange Act (the “FIEA”).

Under the amended Payment Services Act, the law regulating cryptocurrency exchange operators in Japan, such operators must register with the FSA and cryptocurrencies are treated as a means of payment in the same way as electronic money. Changing the governing law to the FIEA, which is applied to securities firms and other financial institutions, will lead to an enhanced investor protection framework. Under the FIEA, cryptocurrency exchange operators will be obliged to manage customer funds separately from corporate funds and will be prohibited from engaging in insider trading. In addition, cryptocurrencies will be treated as financial products.

In response to the massive theft of NEM cryptocurrency from cryptocurrency exchange Coincheck in January 2018, the FSA is conducting on-site inspections on both registered exchange operators and exchange operators with applications for registration pending. The FSA has issued business improvement orders to six major cryptocurrency exchanges, including bitFlyer, which is one of the leading exchanges in Japan and a registered operator. In the light of these developments, various changes are taking place, including the replacement of Board members of the self-regulatory body for the cryptocurrency industry.

Concerning regulations on cryptocurrency exchange operators, three government agencies, namely National Police Agency, FSA, and Consumer Affairs Agency, held a director-general level meeting on June 27. They appeared to have discussed past and current approaches to cryptocurrency exchange operators, exchange operators with applications pending, and unregistered operators. Consideration given to the change to the FIEA seems to reflect these recent developments. The FSA seems to be taking a step toward bolstering customer protection and increasing market transparency with the shift to the FIEA.

Bringing cryptocurrencies under the purview of the FIEA will enable financial institutions to handle cryptocurrencies. This could prompt new players to enter the cryptocurrency industry in Japan. Shifting to the FIEA will also open up the possibility of new cryptocurrency-related financial products, including cryptocurrency exchange-traded funds (“ETFs”), which have not been launched in Japan.