Japanese Financial Regulator Rejects Crypto Exchange Application for First Time

08.06.2018

Japan’s Financial Services Agency (FSA), the country’s foremost financial authority, issued its first ever rejection of an application for a license to legally operate as a cryptocurrency exchange.

The FSA announced the widely-expected rejection on June 7, officially preventing Yokohama-based FSHO from offering cryptocurrency exchange services in Japan. According to the FSA, FSHO was a “corporation that has not established a system to properly and reliably carry out [services] in the virtual currency exchange industry.”

FSHO first attempted to register as a cryptocurrency exchange on September 26, 2017, but the FSA’s ultimate denial of the application came after a series of failed inspections and reviews. The FSA began scrutinizing domestic exchanges much more closely following the $530 million hack of Tokyo-based exchange Coincheck in January.

Most importantly, the FSA determined that FSHO lacked security measures and did not adhere to know-your-customer (KYC). Specifically, the regulator had demanded that FSHO demonstrate a more effective system of flagging suspicious transactions that might indicate money laundering, demonstrate stronger countermeasures against terrorism financing, and implement real-time settlements in their trading system.

After a second inspection in March 2018, the FSA found that FSHO did not comply with their business improvement order. They suspended FSHO’s operations for two more months and ordered the company to form a new management team. However, the FSA’s most recent inspection of FSHO showed that the old management team retained “substantial control” over the company’s decision making.

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