May the 1st marks Japan’s first day with its latest rules and regulations surrounding cryptocurrencies.
One of the more progressive countries in the development and integration of cryptocurrency is set to implement some major amendments for enhanced crypto regulations. These amendments were released to the public last May 31, 2019, and will go into effect today, May 1, 2020.
Major changes in the crypto space include the segregation of cryptocurrency custody service providers that do not sell, purchase, or intermediate the sale and purchase of cryptocurrencies from cryptocurrency derivatives businesses. While the former follows the regulations of the Payment Services Act (PSA), the latter must register to the Financial Instruments And Exchange Act (FIEA).
Additional requirements to applying as a registered crypto asset exchange service provider (CAESP) include the mandatory disclosure of holders that have 10% or more voting rights, as well as the maintenance of net assets that are not less than the aggregate value of crypto assets held in custody for customers in hot wallets (assuming crypto asset exchange service provider holds customer assets in custody.).
In terms of customer assets, the revisions stipulate that the customer’s cash must be held in a trust account. CAESPs now have an obligation to hold crypto assets in cold wallets or their equivalent.
With regards to cash, CAESPS must set aside any cash held for its customers and have it maintained in a trust account operated by a licensed trustee, with the customers of the CAESP listed as beneficiaries.
For crypto assets, customer’s crypto assets must be segregated from the assets of the CAESP and maintained in cold wallets. The CAESP must ensure that its own crypto assets have been stored in separate cold wallets and equivalents.
CAESPs are now also obliged to undergo an audit at least once a year.
One of the revisions included the need to have a contingency plan should CAESPs become incapable of providing the crypto assets to customers as required under the contract both parties agreed to. While this provision has not yet been thoroughly elaborated, it is clear that this is one of the country’s ways of ensuring that crypto-investors have more safeguards when dealing with cryptocurrency.
There are also additional requirements to the list of “best execution” practices for CAESPs. These include the following:
- Full transparency to customers regarding the most recent prices at which they have fulfilled orders for other customers
- Establishment of systems and policies that can detect conflicts of interest in transactions and publish this information.
- Measures to detect and suspend inappropriate trading and high-risk crypto assets.