On 17 January, the Singapore-based cryptocurrency exchange, Huobi, one of the largest players on the market, was re-launched as a fully licensed platform in Japan after the merger with the BitTrade platform.
Heading to Japan, where compliance is appreciated and many regulatory measures are imposed on crypts by national regulators, it is a complex process. Here's how Huobi entered the market and which companies could soon follow the example.
Specifications of the Japanese market and the role of the FSA in it
Japan is one of the world's largest cryptocurrency markets. Bitcoin (BTC) and altcoin can be used as a legally accepted means of payment, even if they are not considered "legal tender". Being closely supervised by the national financial institution, the Financial Services Agency (FSA), the Japanese cryptographic market is also one of the most compliant and regulatory-oriented.
After the change of the Japanese payment services law in April 2017, all crypted exchanges in the country are required to register with the FSA. Counting the recent merger of Huobi with BitTrade, the pool of exchanges authorized to serve the Japanese market currently consists of 17 platforms: Money Partners, Liquid (formerly known as Quoine), Bitflyer, BitBank, SBI Virtual Currencies, GMO Coin, Btcbox, Bitpoint, Fisco Virtual Currency, Zaif, Tokyo Bitcoin Exchange, Bit Arg Exchange Tokyo, FTT Corporation, Xtheta Corporation, Huobi and Coincheck.
The FSA is known to have a tight grip on local exchanges, reacting firmly to security breaches after a series of high-profile local encryption incidents, namely the bizarre $ 532 million coinking of last year and the infamous collapse of the Tokyo mountain. Gox. The FSA also conducts on-the-spot inspections of trade pending registration and, occasionally, requests that exchanges submit their reports on the risk management system as a result of security breaches.
For example, in March 2018, following the Coincheck hack, the watchdog sent "notices of punishment" to as many as seven encryption exchanges and temporarily blocked the activities of two others after a round of inspections. Corporate improvement orders were sent because of the lack of "appropriate and required internal control systems", with Coincheck being specifically cited because there was no framework to prevent money laundering and terrorist financing. Shortly after the regulator's move, two local exchanges – Mr. Exchange and Tokyo GateWay – decided to close the store.
As a result of the in-depth supervision of the FSA, some players have decided to leave the Japanese market. Binance, one of the world's largest cryptographic exchanges that had opened an office in the country, turned to Malta – the famous cryptic country – after the regulator issued a warning in March 2018. At the same time, the cryptic exchange of Kraken also decided to terminate its services in Japan, although citing the increased costs of doing business there as the main reason for the transfer. The Japanese social messaging app line also decided to exclude the domestic market before the launch of its cryptocurrency, citing the local regulatory difficulties.
In May of last year, the FSA extended other regulatory provisions for national cryptographic exchanges, intensifying its efforts to prevent another major attack. Exchanges were necessary to monitor client accounts several times a day in the event of suspicious fluctuations and must comply with stricter anti-money laundering measures (AMLs) that specifically require Know Your Customer (KYC) controls, such as verification of ID. There have also been reports concerning the FSA that potentially prohibit the trade in altcoin-oriented anonymity – such as Dash (DASH) and Monero (XMR) – in the future.
In July, the agency was subjected to an important attempt to improve its presence in the fields related to fintech, including cryptocurrencies. Therefore, the Office for Strategy Development and Management has replaced the Inspection Office to develop a strategy for financial strategy and manage issues related to the digital currency market, fintech and money laundering.
The Office of Policies and Markets, in turn, succeeded the Planning and Coordination Office, and was tasked with developing a legal framework that addresses the rapid growth of the fintech sector.
In August 2018, Toshihide Endo, the FSA commissioner, said his agency wants the cryptocurrency industry "to grow up under appropriate regulation". The official added:
"We are not going to brake [the crypto industry] too. We would like to see it grow according to the appropriate regulations ".
In response to regulatory pressures, a self-regulatory body called Japan Virtual Currency Exchange Association (JVCEA), consisting of local exchanges, emerged. In October 2018, the Japanese financial regulator formally granted self-regulatory status to the JVCEA to oversee the encrypted sector. Therefore, the JVCEA could have a better voice when it comes to industry standards in the future. In particular, the self-regulation group is expected to develop AML policies for encrypted exchanges.
The way Huobi obtains the authorization of the FSA – and similar attempts from the past
Founded in China in 2013, the Huobi Group is headquartered in Singapore from the Beijing crackdown on national cryptographic power plants in September 2017. As part of its efforts to expand abroad, the platform has recently renamed the platform to trading of strategic partners based in the United States HBUS to best recognized the name of Huobi. Now the platform – currently the world's sixth largest in terms of daily trading volume – has expanded on the Japanese market. The arrival of Huobi follows the news on Coincheck that has received full permission from the FSA to continue operating in the country after the aforementioned security breach.
Huobi's press release emphasizes its security precaution, emphasizing that Huobi Japan "presents a distributed specialized architecture, a Distributed Denial of Service (DDoS) countermeasure system and an SSL certification with A + score (the most high available). "
According to the official announcement, Huobi Japan supports the trading of Bitcoin, Ethereum (ETH), Bitcoin Cash (BCH), Litecoin (LTC), Ripple (XRP) and Monacoin (MONA).
It is important to note that Huobi has not received the FSA license from scratch, instead passing through a different path. Although the Japan Payment Services Act allows foreign traders to register in the country as "virtual exchange service providers", Huobi has relaunched as a fully licensed platform in Japan after acquiring a majority stake in BitTrade last September. At that time, BitTrade was one of only 16 encryption exchanges in the country to have obtained a license from the FSA.
However, the expansion of the Huobi market through the acquisition of a pre-approved FSA platform is not a completely new move: in June 2018, BitTrade became the first Japanese platform with FSA license to be fully purchased by an international investor, Singapore multi-millionaire and entrepreneur Eric Cheng. The investor has also acquired the affiliated company of BitTrade at the moment, FX Trade Financial Co., Ltd – one of Japan's leading forex trading platforms. Following the Huobi agreement, FX Trade Financial retained 25% of the BitTrade shares.
More exchanges to receive the blessing of the FSA: Coinbase, Yahoo and others
The other players are just getting ready to enter the market, still waiting to get the clearance from the FSA. As reported by Cointelegraph Japan on January 12, seven applications will be approved or rejected by the FSA within six months. The article also revealed the complex and long routine of the FSA to review cryptographic exchanges that required a license.
Therefore, the FSA conducts a procedure that takes almost six months from the time of application – which includes submitting answers to over 400 questions – to the final decision.
After receiving the answers, the FSA communicates with the company to verify its business plan, governance, IT security and management system, along with the financing measures of the AML and counter-terrorism. At this stage of the review, which is reportedly about four months, agency agents personally verify company practices in person. Subsequently, the company officially presents its application to the FSA. The agency then revises the documents and decides whether or not to grant the license.
The regulator stated that as of January there are 21 companies participating in the first part of the review, while seven are already in the decision making phase. Therefore, up to seven companies could get a new license by summer. In total, the FSA received approximately 190 license requests for the exchange of cryptocurrencies.
Perhaps the most important of the waiting candidates is Coinbase, based in San Francisco, which revealed its plans to enter the Japanese crypto market in June 2018. Being a compliance-oriented company, Coinbase made positive comments on the Japanese cryptic climate in passed, saying that the FSA's intense focus on security is "good for us". Given that the American stock exchange had originally planned to establish its operation in Japan "within the year", the FSA will probably approve or decline its application at some point in the next few months.
In addition, the Yahoo Internet giant's Japanese arm will open its own encryption "in April 2019 or later", through the purchase of 40% of BitARG Exchange Tokyo. Other potential players to open an encrypted exchange in Japan include Mitsubishi UFJ Financial Group, the largest national bank. In January 2018, the South Korean newspaper KBS reported the financial group's plans, however since then there has been no update.
In addition, Money Forward, the company behind a popular financial management application that has over 7 million users in Japan, recently shared details regarding the upcoming launch of its cryptocurrency. Therefore, Money Forward is planning to open their platform yet to be named between January and March 2019, although it depends on how the registration with the FSA will go.