FSA rejects application for registration of Japan-based cryptocurrency exchange in further crackdown

The Japanese Financial Services Agency (the "FSA") has rejected the application of a domestic virtual currency exchange to become a registered operator under The Payment Services Act 2017. This is the first time the FSA has denied such an application. The FSA declined the application because of its findings that Yokohama-based cryptocurrency exchange, FSHO, lacks the necessary systems to safely operate its business, and in particular did not provide adequate customer identity verification in the case of suspicious transactions. The exchange was recently issued with two business suspension orders after finding that it had insufficient customer verification (KYC) procedures, which ended on 7 June 2018. This is a further demonstration of the tougher stance adopted by the FSA amid efforts to re-establish a sound cryptocurrency trading environment in Japan, as reported in our March, April and May updates.

Meanwhile the self-assembled association of the existing 16 FSA registered exchanges, known as the 'Japan Virtual Currency Exchange Association' (the "JVCEA"), which was introduced in our April 2018 update, has published new voluntary regulatory guidelines which explicitly prohibit insider trading and the use of untraceable currencies by exchanges, in particular prohibiting exchanges from accepting new currencies that cannot be traced back to previous sellers. Such currencies are more likely to be used in money laundering schemes. The JVCEA is due to vote on the proposal on June 27 and will adopt the rules once the JVCEA is recognised as a self-regulatory body by the FSA.

Nevertheless, FSA led inspections have concluded that six cryptocurrency exchanges, BitFlyer, Quoine, Tech Bureau, Bitbank, BITPoint Japan, and BtcBox also do not have adequate internal management systems, including their measures to prevent money laundering. As an example, some of these exchanges allowed transactions which were suspected of involving money laundering to pass through, or failed to properly maintain lists of people associated with organised crime for checking against users of the exchange. These six exchanges are in fact already registered with the FSA and form part of the JVCEA. This has highlighted concerns that even registered exchanges cannot safeguard quickly enough against new risks and challenges of misuse. The FSA issued all six with business improvement orders on 22 June 2018. As a result, and only a week after the JVCEA published its first guidelines on best-practice for exchanges, the CEO's of BitFlyer and Bitbank announced they would step down from their positions as vice presidents of the JVCEA.

Further findings of data falsification at Japanese automaker Subaru Corp.

Further cases of data fabrication have been uncovered at Subaru Corp. prompting members of senior management to step down from senior roles and relinquish their rights to represent the company in order to oversee additional investigations into the misconduct. Subaru Corp. has now announced that, since 2002, employees improperly recorded fuel economy, mileage and emissions data during the final inspection process for new cars in Japan for almost double the number of vehicles initially reported. The new data-rigging figures were uncovered during a review in May at Subaru Corp.'s headquarters by the Ministry of Land, Infrastructure, Transport and Tourism.