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Tuesday, 07 February 2023
Japan Looking to Revise Forex Law to End Cryptocurrency Sanctions Loophole

Japan Looking to Revise Forex Law to End Cryptocurrency Sanctions Loophole

2022-10-31

 

As cryptocurrencies continue to gain mainstream recognition, the number of countries that have or are considering cryptocurrency regulations continues to grow. One of the most common regulatory responses to cryptocurrencies has been to implement stricter Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) policies.

On June 10, the Japanese government revealed its upcoming revision of the country’s forex (foreign exchange) law. This law change aims to eliminate the loophole that allows Japanese cryptocurrency exchange operators to skirt the country’s stringent anti-money-laundering (AML) laws. Currently, cryptocurrency exchanges that operate in Japan are not subject to the same AML requirements as other financial institutions. As a result, cryptocurrency exchanges in Japan have been able to largely bypass anti-money-laundering laws and regulations.

This regulatory change is part of the Japanese government’s plan to implement a comprehensive law that regulates cryptocurrency exchanges in the country. Once the forex law revision takes effect, cryptocurrency exchanges in Japan will need to meet the same Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) standards as other financial institutions. The revised forex law will also require cryptocurrency exchange operators to disclose the identity of their clients and report suspicious activity to the government.

Purpose of Japan’s Forex Law Revision

The Japanese government has been working on a comprehensive law that regulates cryptocurrency exchanges since the beginning of the year. In March, the government announced that it had formed a special task force to “thoroughly” review existing financial laws and framework to “define new rules” that will govern virtual currencies in Japan. As part of this effort, the task force held public hearings in May, during which it solicited public feedback on how to best regulate virtual currencies in Japan.

The task force is now finalizing the details of a new cryptocurrency regulatory framework that will replace Japan’s antiquated forex laws. The task force is expected to publish a final version of the forex law revision this fall. The timing of the release of the forex law revision is significant, as it comes on the heels of a similar move by the Japanese government to revise its own financial regulatory laws. On June 10, Japanese Finance Minister Taro Aso announced that the Japanese government would be revising its financial regulatory laws to “put an end” to the country’s long standing policy of “sunset review.” The Japanese government will now conduct “permanent” reviews of financial regulations, which will include a review of the country’s cryptocurrency regulatory framework.

Problem with Existing Japan’s Crypto Regulations

Japan currently has two separate sets of cryptocurrency regulations. The first set of regulations applies to “fmfs,” which are currently defined as “currency shops” and “securities exchanges.” These fmfs are regulated by the Financial Services Agency (FSA), Japan’s financial regulatory body. The FSA has issued a series of guidance documents to clarify the regulatory distinction between currency shops and regulated exchanges.

Currence shop operators are not subject to the same level of government oversight that applies to other financial institutions. For example, the FSA does not require currency shop operators to register as money transmitters, maintain customer funds in segregated accounts, or follow Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) requirements.

 
 
 

This regulatory gap results from the fact that Japan’s financial regulators have yet to issue a formal regulatory framework for the country’s cryptocurrency sector. This lack of regulatory clarity has allowed crypto exchanges in Japan to largely sidestep certain AML requirements.

Change to Forex Law Being Consider by the Japanese Government

In May, the Japanese government announced that it was working with the FSA to “revise the law” that governs forex transactions. This forex law revision is aimed at closing the loophole that currently allows cryptocurrency exchanges to operate in Japan without following the same Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) requirements as other financial institutions.

The Japanese government’s June 10 press release discusses the need to implement “strict regulation” of virtual currency exchange operators. The release states: “The government is revising the law to eliminate the loophole that currently allows certain businesses that trade in virtual currency to be exempt from some of the requirements” set forth in Japan’s Financial Instruments and Exchange Act.

How a Revised Japan’s Forex Law Will Affect Cryptocurrency Exchanges

The revised forex law will impose stricter Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) requirements on cryptocurrency exchange operators in Japan. The law will also require cryptocurrency exchange operators to register with the government and report Significant Investor Transactions to the government.

The revised forex law will also prohibit anonymous trading accounts. Currently, most cryptocurrency exchanges in Japan maintain anonymous trading accounts as an operational best practice. Anonymous trading accounts will no longer be an option once the revised forex law goes into effect.

Bottom line

The Japanese government is poised to implement stricter Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) policies for cryptocurrency exchanges. Once the revised forex law goes into effect, Japan-based cryptocurrency exchanges will be required to meet the same Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) standards as other financial institutions. The revised law will also prohibit anonymous trading accounts.

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