Japan's FSA tightens screening process for aspiring cryptocurrency exchanges

The Financial Services Agency has effectively tightened its registration screening for cryptocurrency exchanges to see whether they are properly conducting risk management, sources say.

Such registration processes are conducted under the revised Payment Services Act, which took force in April 2017 to protect cryptocurrency users.

The state watchdog has increased the number of questions asked when screening applications to about 400 items, up fourfold, sources said Saturday. It now obligates applicants to submit minutes of board meetings so it can check whether enough discussions have been held about measures to sustain the company’s financial health and ensure the security of its computer system, the sources said.

The FSA’s screening of cryptocurrency exchanges resumed after a suspension was imposed following the cyber-theft in January of about ¥58 billion in customer assets from Tokyo-based Coincheck Inc.

In its screenings, the FSA conducts on-site inspections to verify answers submitted to questions that were sent to the applicants beforehand.

Previously, the questions only covered such items as an applicant’s financial status and measures to ensure system safety.

The agency now intends to assess whether company executives are properly involved in decision-making by perusing the records of board meetings, the sources said.

The upgraded screening process also regularly reviews the composition of an applicant company’s shareholders, while examining if an internal system is in place to check for links to antisocial groups, the sources said.

The FSA’s on-site inspections have revealed sloppy internal controls at cryptocurrency exchanges, including a lack of board meeting minutes.

More than 100 companies have shown interest in being registered as cryptocurrency exchange operators. The stricter process may prompt some to give up, analysts said.