But they left the storage of assets to a set of non-binding guidelines
Exchanges should keep the encrypted keys needed to access digital money in “cold wallets” – for example, USB drives not connected to the internet – only if doing so didn’t overly inconvenience customers, the guidelines said.
In effect, the clause left no obstacle to Coincheck’s holding $530 million worth of NEM crypto-coins in an online “hot wallet” – essentially a digital folder stored on a server – from which the funds were stolen.
“The FSA was quite relaxed on protecting consumers on things like cold wallets and hot wallets,” said the chief financial officer of a major Japanese cryptocurrency exchange.
JAPAN VERSUS THE WORLD
Policymakers across the world have grappled with how to deal with cryptocurrencies. Most have been skeptical about trade in digital assets.
U.S. regulators may ask Congress to legislate more oversight of digital money, the head of the Securities and Exchange Commission said this month.
In Asia, South Korea is embracing strong oversight of cryptocurrency trading, at one point saying it might shut down local exchanges. China, concerned about financial stability, last year ordered some exchanges to close. India this month vowed to stamp out use of cryptocurrencies altogether.
Statistics on cryptocurrencies are patchy because their trading is unregulated in most countries. But Japan accounts for between a third and half of all global bitcoin trade, exchange operators say – a share of the market that has grown as other jurisdictions have cracked down.
As Japan’s rules came into effect last April, exchanges were given six months to register.
But even those that registered but weren’t approved could continue to operate.
Coincheck was among the exchanges that didn’t win approval
By the time it filed its application in mid-September, bitcoin was surging towards a record high of $19,458, which it hit in December.
The exchange had grown to one of Japan’s biggest amid a sharp increase in trading, moving to a new headquarters from a dingy backstreet office. Its share of domestic bitcoin trades soared to 55 percent in December from only 7 percent a year earlier, data from Jpbitcoin.com show.
In an interview with Reuters last year, Kaga Kawabata, Coincheck’s business development manager, was dismissive of the FSA’s oversight, even as the exchange prepared to register.
“They have no knowledge. Every year someone moves, and it’s a big pain to educate them,” he said.
The FSA said last week it didn’t approve Coincheck partly because of worries about weaknesses in the exchange’s systems, declining to give further details. It allowed Coincheck to continue operating, calling for improvements without a specific timeline.
The regulator was in a bind, industry insiders said: Coincheck had grown so big that the FSA couldn’t reject its application.
“Consumers would be upset. It was politically difficult to close down Coincheck,” said Masakazu Masujima, a lawyer and adviser to the Japan Cryptocurrency Business Association, an industry body. “So they kept requesting it to improve its systems.”
(Reporting by Thomas Wilson and Takahiko Wada; Additional reporting by Minami Funakoshi, Ami Miyazaki and Taiga UranakaEditing by Gerry Doyle)