Japan’s FSA Prepares Legislation to Prevent Domestic Crypto Outflow in Case of Exchange Failure

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Sujha Sundararajan

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November 6, 2024 01:04 EST

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Japan’s Financial Services Agency (FSA) is working on legislation to prevent the leak of domestic cryptos overseas in case of bankruptcy.

According to a report from local media Nikkei, the FSA is planning to create a new “holding order” in the existing Payment Services Act. This would prevent the outflow of domestic assets when there is an exchange failure.

“The aim is to properly protect the assets of individual investors, as there have been a series of cases of illegal leaks of cryptocurrencies,” the report noted.

FSA’s new proposed holding order would ask crypto exchanges not to take domestic assets entrusted to them by overseas customers.

Here, customers refer to Japanese residents who use foreign exchanges and lose entire funds in case of bankruptcy like FTX.

So far, holding orders have been available only to businesses that are registered as financial instruments exchanges under the Financial Instruments and Exchange Act.

According to the FSA database, 29 exchanges are registered and are already legally restricted from allowing asset leakage overseas.

At the time of the FTX’s implosion, the beleaguered exchange was registered as a financial instruments firm. As a result, a holding order could be issued. However, the proposed changes could safeguard the domestic assets in a much broader scale.

FSA Plans to Review Crypto Regulations

Recently, the regulator has been keen on reviewing crypto regulations, potentially leading to lower taxes and allowing crypto ETFs.

The FSA has been assessing whether the existing framework is still suitable given digital tokens’ evolving role. Japan’s financial watchdog noted that the review would likely continue through the winter, aiming to determine whether investors are protected under the existing act.

Yuya Hasegawa, market analyst at Bit Bank Inc., said that stricter laws could bring “dramatic changes” to Japan’s crypto market.

In addition to the FSA’s review, Japan has already taken several steps to support its crypto and blockchain ecosystem. For instance, the government allowed local investment ventures to invest in cryptos. The move is a part of a broader legislative changes to encourage VC investment in web3 projects, it added.