Role of Crypto-currency Exchange
and Japanese VC Act
SO SAITOFOUNDER AND REPRESENTATIVE LAWYER
SO LAW OFFICEJUNE 18, 20181

Speaker’s biography
Admitted to the bar in Japan (1999-) and in the State of
New York (2005-)
Founder and representative lawyer of So Law Office (2015-)

Legal Advisor to Japan Blockchain Association (JBA) (2014-)
Specialized in Crypto-related law since 20132

Today's lecture content-The role of the virtual currency (VC) exchanges-Japanese VC Act and regulations-Impact on regulations by the Coincheckincident- Future of Regulation

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I Role of ExchangeThere are mainly two type exchanges(i) Exchange-type exchange (It matchs sales and purchaseorder between users)(ii) Shop-type exchange ( It itself sells and purchases crypto)4Role of Exchange – Exchange-Type Exchange
Exchange type exchanges

Exchange

Intermediate
User B

User A
Sales and purchase of VC

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Role of Exchange – Exchange-Type Exchange
Exchange-Type exchange(i) Keeping users’ fiat and VC under custody(ii) Matching of buying and selling of VC between users(iii) Settlement of trading

6Role of Exchange – Shop-Type Exchange
Shop-Type ExchangeExchange

Sales and purchase of VC

User7

Role of Exchange – Shop-Type Exchange
Shop-Type Exchange(i) shop itself becomes a counterparty and trades with users(ii) Often keep users’ fiat and VC in custody8Role of Exchange - Differences
Differences between Two Types(Exchange-Type)• Matching• Fee is cheaper / More volume(Shop-Type)• Direct sale
• More user-friendly (easier to use)
• More alt-coins in Japan9

Role of Exchange – Outside of Blockchain
Exchanges are outside of blockchain
Hacking to exchange is not a fault of Bitcoin systemHowever, exchanges play an important role in crypto
industry• Most users use exchanges and keep their VC in exchanges• Criminal use exchanges for money-laundering

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Risk of Exchange
Hacking risk
Money laundering risk
Regulators want to regulate exchanges

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Ⅱ Japanese Virtual Currency Act
The VC Act was enacted in April ‘16 and is enforced in April‘17
Introducing "registration system"

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Japanese Virtual Currency Act
VC exchanges are required to "register" with JFSA
Obligations:compliance officer, KYC/AML, cyber-security, segregationof exchange’s asset and users’ assets, internal audit, accounting audit,audit on segregation, explanation duty to users, etc.
6 months to 1 year

More than JPY100M cost?

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Japanese Virtual Currency Act
16 companies have been registered including bitFlyer, Zaif,
QUOINE, GMO Coin, DMM Bitcoin, SBI Virtual Currency
4 companies (including Coincheck) are operating under
deemed registration (transitional measures)More than 100 companies are applying

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Market Entrants from Overseas
There are many applicants from overseas

They are from all over the world including the US,
Europe, Russia and former Soviet Union, and China

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Reasons for entry to Japan Market
Stability of the law
Large trading volume
Bank accounts are relatively easier to open

However, it is in question if the said perceived
advantages still remain
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Trading Volume of Japanese Exchanges

https://jpbitcoin.com/market/volume

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Ⅲ Coincheck incident and afterwards
On January 26, ’18, NEM equivalent of approximately
JPY58 billion was hacked from Coincheck
Coinchek kept all NEM in hot wallet

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Coincheck incident and afterwards
Coincheck has repaid all stolen loss to its users with JPY (1NEM=JPY88.5, total 46 billion) from its own asset
Many were surprised to find the scale of profitability of
exchanges

Monex, a leading online security company, purchased
Coincheck19

Coincheck incident and afterwards
The FSA’s Examination after the Coincheck incident◦ On 1st February, all registered exchanges and deemed registeredexchanges were ordered to report on system risks◦ On-site inspection is being conducted first on Coincheck,thereafter on each registered and deemed registered exchange◦ Business improvement order, business suspension order, refusal ofregistration were issued to exchanges

20Virtual Currency Act – Review becomes
Stricter
Original intention at the time of legislation in ‘16→ Enabling the startups to engage in VC business
Review became stricter in mid 2017 because of surge in VC
prices and hardfolk of Bitcoin◦ FSA’s special monitoring team was formed◦ Hundreds of questions are being asked when applying forregistration

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Virtual Currency Act – Review becomes
Stricter
Review becomes far stricter after the Coincheck incidents
Security, Advertisement, Operation, Internal Management,Insider, Anti-money laundering, Market Maneuvering
There are no new exchanges nor new coins admitted sincelast December

22Coincheck incident and afterwards
JFSA Workshop on Virtual Currency Exchange Business (April2018 -)◦ FSA’s Research group of experts

Japan Virtual Currency Exchange Association (April 2018 -)◦ Established as voluntary self-regulatory organization, butaiming to be legally-mandated SRO. 16 registered exchanges
currently join. Scope of self-regulation is being discussed
including, security, AML, market manipulation, etc.

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Ⅳ ICO Regulation
ICO is abbrevation of “Initial Coin Offering”
Fund-raising by selling so-called “coins” or“tokens”
Still remains global hot topics being followedwith growing enthusiasm

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ICO Regulation
In December `17 JFSA revealed its view torelevant parties that ICO tokens constitute, tothe extent they have the probability of being
listed later, "virtual currency“25ICO Regulation"Registration of virtual currency exchange business" +"notification of coins" are required for ICO in Japan.
December `17 onwards no ICO was being launched as
unequivocally in compliance of the laws.

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Ⅵ Future Japanese virtual currency
exchange industry
The VC Act in Japan was perceived as advanced
and forward-looking when published

A lot has happened in one year thus the act
started to lag behind the fast-changing reality

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Future Japanese virtual currency
exchange industry
As drafted, the law was meant to promote
innovation, but as currently operated it is tofurther regulate the industry
Balance between innovation and regulation
No conclusion yet, should discuss28