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Illustration of an obstacle with the flag of Japan as a bar.

Artwork: Allie Carl/Axios

Crypto exchanges in Japan have different rules than exchanges in other parts of the world.

Why is this important: FTX Japan, by all reports, has not been short of client funds, and this could be attributed to the stricter laws in place for the operation of exchanges in Japan.

Rollback: In 2018, Japanese crypto exchange Coincheck had hundreds of millions of dollars in NMS cryptocurrency Fly.

  • This followed one of the other most notorious hacks in crypto history, Mt. Gox, which was also based in Japan. A comparable amount was stolen from this bitcoin-only exchange in 2014.

The legacy of these consumption losses it was urgent for Japan to create new rules for crypto exchanges, which are stricter than most other countries have done, according to Ananya Kumar of the Atlantic Council, part of the team behind the organization Crypto regulatory monitoring.

How it works: Kumar highlighted several key rules for such businesses in Japan, including:

  • Client assets and company assets must be held separately, with assets verified in annual audits.
  • Exchanges must be members of a self-regulatory body recognized by the financial regulator.
  • Investors cannot trade with more than 2X margin on exchanges, which is much lower than elsewhere, according to the Japan Times reported.

Meanwhile, 95% of all client funds must be held by exchanges in cold wallets. That is, the wallets are not actively connected to the Internet.

  • 5% of client funds can be prepared for withdrawal by holding them in hot wallets, but the exchange must self-insure anything in hot wallets with its own funds in its own cold wallets.
  • In other words, if there was a breach in the hot wallet, the exchange could cover it with its own funds.

What they say : “What caused the latest scandal was not the crypto technology itself,” said Mamoru Yanase of Japan’s Financial Services Agency (FSA). told Bloomberg. “It’s loose governance, lax internal controls and lack of regulation and oversight.”

  • The FSA is urging the rest of the world to match Japan’s surveillance.
  • “I think Coincheck was a big regulatory moment in Japan that didn’t affect other countries as much,” Kumar said.
  • To note : According to reports from the Japan Times. Not because the assets are not there, but because of unknown legal obligations to the originating company.

The other side: Not everyone is enthusiastic about Japan’s rules.

  • They make running an operation more expensive there than elsewhere, which might explain why US stock exchanges, kraken and Coinbaseboth have recently left the country.

By the numbers: About 30 exchanges operate in the country, according to the Financial Services Agency. Some of them may, however, include custodians, which are also subject to the rules.

Quick take: Customers may be better protected in Japan, but it’s not exactly a hotbed of competitive crypto firms either.



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