With the deadline to implement the travel rule looming, Japan’s cryptocurrency exchanges say that they are in negotiations with regulators to limit the rule’s scope to major tokens.
The travel rule requires virtual asset service providers (VASPs), like Japan’s crypto exchanges, to share customer data on transactions above a certain threshold. The rule was recommended by the Financial Action Task Force (FATF), an intergovernmental organization that sets standards for financial policy for the G7 and another 30 or so developed countries.
In March of this year, Japan’s Financial Services Agency (FSA) requested virtual asset services providers to implement a framework to fulfill the travel rule. The Japan Virtual Assets and Crypto Assets Exchange Association (JVCEA) is expected to introduce self-regulatory rules by April 2022, according to the same notice.
VASPs in Japan will send identifiable information on users to each other but won’t have to send user data to the regulator, representatives from Japanese VASPs told CoinDesk. The idea is that it makes it easier to identify suspicious transactions related to money laundering and terrorist funding.
“We have to replace our system,” Genki Oda, vice chair of the JVCEA and president of crypto exchange BITPoint told CoinDesk.
“The timeline is quite tight,” said Takeshi Chino, managing director of Kraken Japan.
Chino said that most exchanges want to use existing solutions proposed by the vendors and that they are discussing interoperability, but so far there is no “clear answer.”
Another concern is that covering all assets places a heavy compliance burden on exchanges.
“We are not sure whether all of the member exchanges can comply if we start with all the asset classes, including minor tokens,” Chino said.
He added that the Japan Cryptoasset Business Association’s (JCBA) wants to take a “risk-based approach” and to “gradually increase the number of assets we cover under the travel rule.”
Chino said it was too sensitive to disclose specific details of discussions between JCBA members. He did reveal that among questions raised was who would be subject to the travel rule. Though the travel rule would be applied to inter-VASP transactions, he said it was not clear whether hosted wallets or cross-border transactions would also be subject to the rule.
AML and KYC
FATF found that Japan’s national policies “lack targeted AML/CFT [anti-money laundering and combating financing terrorism] activities,” according to an August report. The task force classed virtual asset risks among Japan’s higher risks.
Its assessment noted that Japanese mafia members were increasingly turning to virtual assets to launder proceeds from crime and that service providers were more focused on consumer protection than on money laundering or terrorist risks.
In response to FATF’s assessment, Japan’s FSA expects cryptocurrency exchanges to build system infrastructure which flags suspicious transactions.
Ken Kawai, lawyer at Anderson Mōri and Tomostune, expects Japan to revise its laws on AML/CFT in 2022 and to start implementing them in 2023.
Compliance costs
Implementing the travel rule is yet another compliance cost for Japan’s crypto exchanges.
“Most of the Japanese exchanges have made a loss over the last few years, although income of 2021 is becoming better,” said So Saito, Partner at So & Sato law firm based in Tokyo.
The industry is divided into two camps: those that can afford to keep up with the regulations and those that cannot. “The latter has been struggling to survive,” a spokesperson for exchange Bitbank told CoinDesk.
“Additional income sources that may be available to foreign exchanges such as high leverage trading are not available in Japan,” said Saito.
Japan halved the maximum leverage for margin trading to 2x this year, far below Binance and FTX’s limit of 20x.
“The industry has asked the FSA to ease the regulatory burden as the strict regulations will ultimately drive consumers overseas where they will not be protected at all,” said Saito.
Read more: Japan Moves to Impose New Regulations on Stablecoin Issuers: Report
