Japan’s crypto self-regulation ‘experiment’ isn’t working

Japan’s self-regulatory “experiment” for the crypto industry is reportedly not working as well as intended, according to local authorities and industry experts.

Since 2018, the Japan Virtual Currency Exchange Association (JVCEA), a self-regulatory entity, has been tasked with creating guidelines for the country’s crypto industry, arguing at the time that the entity could be better able to tackle crypto regulation than a government body.

Speaking to the Financial Times (FT) on July 18, an unnamed source “close to both industry and government” said the current model of crypto regulation is faltering:

“When Japan decided to experiment with self-regulation of the cryptocurrency industry, many people around the world said it would not work. Right now, unfortunately, it looks like they might be right.”

The organization was forged in response to the $530 million hack of the Coincheck exchange in 2018. It is recognized by Japan’s Financial Services Agency (FSA) and has the power to adopt and enforce regulatory frameworks for local crypto exchanges.

Its members include a long list of top local crypto names such as Coincheck, BitFlyer and Rakuten Wallet Co, along with the Japanese subsidiaries of FTX and Coinbase.

Over the past few months, JVCEA has reportedly received a fair amount of flak from the FSA for its slowness in getting regulation up and running.

According to the FT, the FSA is said to have highlighted key problems with the JVCEA, including its delays in introducing anti-money laundering (AML) regulation and a lack of communication between directors, member operators and its secretariat – which signal poor management.

The report also noted that the FSA had already issued an “extremely stern warning” to the JVCEA in December to get its operations in order, and that it was “not clear what the body’s deliberations were, what the decision-making process was, why the situation was as it was , and what responsibility the board members were”.

In June, Prime Minister Fumio Kishida also urged the entity to speed up the approval process for listing digital assets on local crypto exchanges, but remain “aware of the need to protect users.”

Another unnamed source close to JVCEA suggested that the organization lacks office staff with genuine knowledge of or interest in crypto.

According to them, the office is primarily composed of retired bankers, brokers and government employees, and lacks representatives from JVCEA’s list of crypto member companies.

“That’s why nobody there really understands blockchain and cryptocurrencies. The whole mess shows that it’s not a simple problem of governance. The FSA is very angry with the whole management.”

JVCEA says it is currently working to make improvements and address the organization’s current issues. However, Meiji University professor and JVCEA board member Masao Yanaga also highlighted that the organization lacks the resources to move quickly.

Yanaga also suggested that AML regulation has been difficult to implement as there is an absence of international agreements on the sharing of customer data between crypto exchanges.

“The operators of the exchanges worry that even if we make these rules, they will not be able to implement them,” he said.

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One area that JVCEA has made small improvements to this year is the criteria for listing digital assets. The entity is tasked with evaluating tokens that local companies intend to list, but it has typically taken the JVCEA around six months or more to complete the screening process.

In March, Cointelegraph reported that the JVCEA watered down some of its requirements by creating a “green list” of 19 assets that no longer require screening, including Bitcoin (BTC), Ether (ETH) and Ripple (XRP).