Japan Tightening Crypto Exchanges’ Oversight on Funds

The regulator is concerned with internal threats on exchange-controlled wallets.

Japan’s financial watchdog is planning to increase the internal oversight of the digital asset storage of cryptocurrency exchanges, according to Reuters.

The Financial Services Agency (FSA) is evaluating the security of so-called ‘cold wallets,” where crypto exchanges store most of their clients’ funds, the April 16 report specified.

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Last year, the FSA restricted the use of “hot wallets” by the digital asset exchanges operating under its purview after a major security lapse. However, the regulator was also concerned with the security of cold wallets as they are not immune to internal threats.

Cold vs. hot wallets

Crypto hot wallets are online wallets that are constantly connected to the internet. These wallets come handy while making crypto payments or even trading on a digital asset exchange. The funds kept in these wallets are often targeted by cybercriminals and exchange operated hot wallets are a very lucrative target as millions in crypto funds are stored in them.

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Cold wallets, on the other hand, are much more secure as they have no outside link. These wallets can be accessed only by connecting them to a computing device with an internet connection, which makes them perfect for storing funds for a long time. These wallets, however, are not suitable for day-to-day use.

Crypto regulation in Japan

In 2017, Japan regulated digital asset exchanges on a national level. However, the attack on Coincheck in early 2018 created a setback in the market and forced the regulator to tighten its grip on exchanges due to their lapses in security and business model.

The financial market regulator also made it mandatory for exchanges to obtain an operational license. Right now, there are 19 registered exchanges in Japan, however, a few of them have not started to offer trading services yet.

Earlier today, Finance Magnates reported that Rakuten Wallet had started the registration process for its crypto trading service whereas another exchange platform initiated its services.

Last month, the country’s authorities also introduced new rules for crypto margin trading by capping massive leverages.

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