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The Background of the Amendment

 

The background of the amendment

The Amended Payment Services Act and The Amended Financial Instruments and Exchange Law came into effect in June 2020. The amendment strengthened the regulations for operating crypto asset exchange business in Japan. The background of this amendment is the inadequate legal and management system within the company that cannot keep with the pace of the rapidly developing blockchain industry. The Mt.Gox incident in 2014 and the Coincheck incident in 2017 are some examples of the incidents caused by inadequate management systems within the company. In the following, we briefly describe these incidents.

 

The Mt.Gox incident(2014)

The Mt.Gox incident in 2014 had a serious impact  on the crypto industry. At the time, the company had one of the largest Bitcoin trading volumes in the world. However, the company's servers were hacked by someone and a large amount of bitcoins and deposits were leaked. This incident was a blow to the company, and it was forced to take on huge debts. As a result, the company went bankrupt. The problem with the Mt.Gox incident was the lack of security. The company did not have a management system that was adequate for the amount of money it handled.

 

The Coincheck incident(2017)

Crypto currency(NEM) was leaked from a major crypto currency exchange, Coincheck. This incident was due to the opening of a link in an email sent to Coincheck employees by a malicious third party. At the time, the company's security system was not up to par for a cryptocurrency exchange company, and the asset was managed in a hot wallet, which led to the unauthorized access.

 

Summary

Both incidents were caused by inadequate internal security and management systems. As a result, a large amount of customers' crypto currency was leaked through unauthorized access and hacking. As for the Coincheck incident, it occurred after the enactment of the Act on Prevention of Transfer of Criminal Proceeds, which included measures against money laundering and terrorist financing, such as the obligation to verify the identity of individuals. Additionally, the speed of technological development as well as the emergence of new related services and their spread is quite rapid when it comes to the blockchain/crypto industry. Thus, the environment surrounding the industry can change drastically in just a year or two. Therefore, without clear rule-making in the blockchain industry, the internal management system of the crypto currency exchange business cannot keep up with the rapid expansion of the business scale. These incidents were calls for more laws and regulations related to crypto currencies in Japan. As a result, it has become difficult to prevent incidents such as those mentioned above.

In addition, under the current situation, crypto currencies are often used as speculative targets for investors. However, before the amendment, there were no clear laws and regulations to protect the users considering the risk of speculation. Based on the background of the improvement of the internal system, the necessity of laws and regulations due to the development of the industry, and the protection of investors, it became urgent to improve the laws and regulations related to crypto assets in Japan for the purpose of protecting investors and users as well as improving the reliability of the financial market. In response to the above trends, the Amended Payment Services Act and the Amended Financial Instruments and Exchange Law came into effect in June 2020.

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