Japan’s Crypto Exchanges Grapple With ‘Travel Rule’ as Deadline Looms

The country’s crypto exchanges want to stagger implementation of the rule, which will require them to share customer data on transactions above a certain threshold.

AccessTimeIconDec 17, 2021 at 8:03 a.m. UTC
Updated May 11, 2023 at 4:27 p.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global hub for everything crypto, blockchain and Web3.Register Now

With the deadline to implement the “travel rule” looming, Japan’s cryptocurrency exchanges say 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 CFT

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 two times 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.

Disclosure

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk offers all employees above a certain salary threshold, including journalists, stock options in the Bullish group as part of their compensation.

Lavender Au

Lavender Au is a CoinDesk reporter with a focus on regulation in Asia. She holds BTC, ETH, NEAR, KSM and SAITO.

Eliza Gkritsi

Eliza Gkritsi is a CoinDesk contributor focused on the intersection of crypto and AI.


Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.