Under the revised law on fund settlements and other regulations, virtual currency exchange operators are required to:

 ■ Register with relevant authorities

 ■ Explain risks to customers

 ■ Manage customer assets separately from their own assets

 ■ Verify the identities of customers when they open accounts

If a violation occurs, the Financial Services Agency takes administrative measures such as issuing a business improvement order.

Japan has taken the lead among advanced nations in regulating cryptocurrencies, including by introducing a registration system for exchange operators. However, the latest incident sheds light on the issues that remain.

One of them is how to protect users.

In the case of deposits, a scheme exists in which deposits of up to ¥10 million plus interest per person are protected under the Deposit Insurance Law. In the case of stocks, securities companies are required to separately manage customer assets such as stocks and money under the Financial Instruments and Exchange Law.

If a customer’s assets are not smoothly paid back under these schemes, a system exists in which a fund established by relevant industries is in principle used to pay back up to ¥10 million per depositor.

However, for virtual currencies, no similar relief programs exist to protect customers against such events as an exchange going bankrupt.

On Tuesday, Coincheck submitted a business improvement plan to the FSA. The company has so far announced a plan to reimburse about ¥46 billion to its clients from its own funds, but when the refunds will take place is unclear.

Virtual currencies are de facto financial instruments used for speculation, but regulations on unfair transactions such as insider trading are nonexistent. Experts are calling for strengthening regulations on virtual currencies in response to the latest incident.

Kyoto University Prof. Naoyuki Iwashita said, “To protect users, the government should consider making virtual currency exchange operators thoroughly implement the separate management of assets and introduce regulations on market manipulation and insider trading.”

Yukio Noguchi, an advisor to Waseda University’s Institute for Business and Finance, said, “It’s worth considering the introduction of regulations on margin trading, which allows traders with only a small amount of money to trade large amounts.”

Many object to banning

However, many oppose introducing tough regulations like those in China, where virtual currency trading is effectively prohibited.

In Japan, many people have already invested in virtual currencies. “Virtual currencies have spread so much that it’s unrealistic to prohibit their exchange, because it could infringe on property rights,” Iwashita said.

Furthermore, the blockchain technology that underpins virtual currency transactions can be used in various fields, including bank transfers and real property registrations. There are expectations within the government that the growth of the virtual currency market could drive the development of blockchain technology, and growth in the Japanese economy.

To achieve such a virtuous cycle, sound market development is needed. It is therefore necessary to develop rules that protect users and prevent unfair acts while paying heed to technological innovations.

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