24 March 2019
Top officials of cryptocurrency exchange Coincheck bow during a news conference in Tokyo on Thursday. Photo: Reuters
Top officials of cryptocurrency exchange Coincheck bow during a news conference in Tokyo on Thursday. Photo: Reuters

Japan punishes 7 cryptocurrency exchanges over control lapses

Japan on Thursday punished seven cryptocurrency exchanges, ordering two of them to suspend business, in an effort to shore up consumer protection, Reuters reports.

Coincheck Inc., one of those punished, said it plans to reimburse from next week investors who lost digital money in the late-January theft of US$530 million.

The exchange also said it plans to resume services for some cryptocurrencies from next week. Coincheck froze all withdrawals of yen and cryptocurrencies following the heist, and resumed yen withdrawals last month.

The Financial Services Agency criticized the exchanges for lacking the proper internal control systems, and ordered them to make improvements in areas from risk management to preventing the criminal use of digital money.

Of the exchanges, Bit Station and FSHO were ordered to halt operations for a month from Thursday.

The punishments represent the FSA’s widest response yet to concerns over security flaws at Japanese cryptocurrency exchanges, which first grew from the 2014 collapse of the Mt. Gox exchange and resurfaced with the Coincheck heist.

The regulator said Coincheck lacked proper systems for dealing with risks such as money laundering and terrorism financing. It gave the exchange until March 22 to submit a report on how it would improve.

“We will carry out a far-reaching review of our internal control and management systems to ensure proper and reliable business operations from the viewpoint of customer protection,” it said in a statement.

The sanctions knocked the price of bitcoin lower while a lawmaker from the country’s ruling party criticized what she saw as flaws in Japan’s registration regime for cryptocurrency exchanges.

Bitcoin fell as much as 5.7 percent, before recovering to US$9,812 at 0600 GMT. The virtual currency hit a peak of US$19,458 in December but has since fallen by more than half following a series of crackdowns by regulators across the globe on the digital coin trade.

The theft from Coincheck, one of the biggest digital money heists ever, underscored the risks policymakers across the globe face in regulating cryptocurrency trading, and drew attention to Japan’s pioneering system of regulating the exchanges.

Unregistered exchanges

Japan last year became the world’s first country to regulate cryptocurrency exchanges. Some 16 exchanges are currently registered, while a further 16, including Coincheck, were allowed to continue operating while their applications are checked.

Five of the seven exchanges punished by the FSA are unregistered, including the two forced to suspend business, Bit Station and FSHO.

A senior employee at Bit Station used customers’ bitcoin for their own purposes, the FSA said, adding that the exchange has now dropped its registration application.

The head of the ruling Liberal Democratic Party’s cybersecurity taskforce said it was not ideal that exchanges that had not registered with the governments should be allowed to continue operations.

“It’s problematic that these 16 unregistered exchanges have been able to continue trading,” Sanae Takaichi told Reuters. “In the first place, should they have been allowed to operate while their applications for registrations are still incomplete?”

GMO Coin, one of those punished, is registered. The FSA said problems with its systems had occurred frequently but the company had not sufficiently analyzed the causes. The regulator ordered it to submit a report by March 22.

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