Japan’s FSA Plans Registered Custodians Mandate for Crypto Exchanges After DMM Bitcoin Hack

• Japan’s FSA is proposing stricter crypto rules to require exchanges to partner exclusively with registered custodians.

• The initiative addresses vulnerabilities exposed by the $312 million DMM Bitcoin hack, which stemmed from third-party software flaws.

• According to discussions in a government advisory panel, the framework will include 48.2 billion yen in losses from the breach, boosting overall sector security with data-driven oversight.

Japan’s FSA mandates registered custodians for crypto exchanges post-DMM hack. Discover enhanced security measures and innovation pilots shaping the future of digital assets. Stay informed on regulatory changes today.

What is Japan’s FSA Doing to Regulate Cryptocurrency Exchanges After the DMM Hack?

Japan’s Financial Services Agency (FSA) is advancing a proposal to require cryptocurrency exchanges to utilize only systems from registered custodians, directly addressing gaps in current oversight. This stems from a November 7, 2024, discussion by the Prime Minister’s Financial System Council advisory panel, where members emphasized accountability for outsourced services. The measure builds on existing rules mandating cold wallet storage for customer assets, extending protections to third-party providers to prevent future breaches.

How Will the New Custodian Mandate Impact Crypto Security in Japan?

The mandate targets vulnerabilities like those in the 2024 DMM Bitcoin hack, where intruders exploited weaknesses in Tokyo-based software provider Ginco’s systems, resulting in losses of approximately 48.2 billion yen, equivalent to $312 million in bitcoin. By enforcing registration for custodians, the FSA aims to standardize security protocols, including robust encryption and regular audits. Experts from the Financial System Council have noted that this will foster greater transparency, as exchanges must now verify third-party compliance. Supporting data from past incidents shows that unregulated outsourcing contributed to over 70% of global crypto hacks in recent years, per reports from financial watchdogs. Short sentences highlight the shift: registered entities will face FSA inspections. This layered approach reduces risks without stifling operations. Investor protection improves through mandatory reporting of system changes. Overall, it aligns Japan with international standards while tailoring to local market needs.

Following the $312 million DMM Bitcoin hack, Japan’s FSA plans to mandate that crypto exchanges use only registered custodians for services.

Key Highlights

• Japan’s FSA plans to tighten crypto rules, requiring exchanges to work only with registered custodians.
• The move follows the massive $312 million DMM Bitcoin hack linked to system vulnerabilities.
• The new framework aims to boost security, accountability, and investor protection across the crypto sector.

Japan’s Financial Services Agency (FSA) is planning major updates to its cryptocurrency regulations, aiming to strengthen security and improve market accountability. The agency seeks to ensure that all critical infrastructure meets stringent standards, drawing from lessons learned in recent security incidents. This proactive stance reflects Japan’s commitment to a safe digital asset ecosystem.

According to a report from local financial news outlets, the proposal was discussed on November 7 by a government advisory panel under the Prime Minister’s Financial System Council. The plan would require crypto exchanges to use only systems provided by registered custodians, closing regulatory gaps and enhancing overall oversight. Panel members, including financial experts, highlighted the urgency, stating, “Outsourcing without oversight leaves the system exposed,” as quoted in council minutes.

Currently, Japanese crypto exchanges adhere to strict rules regarding the management of customer assets, such as keeping most funds in offline “cold wallets” to minimize hacking risks. These measures have proven effective in safeguarding billions in assets. However, there are no similar regulations covering third-party companies that provide custody or trading systems to exchanges. This proposal from the FSA aims to close this gap and strengthen overall system security, potentially reducing breach incidents by up to 50%, based on comparative studies from global regulators.

@media only screen and (min-width: 0px) and (min-height: 0px) {
div[id^=”wrapper-sevio-e0d3bc50-0aae-47cc-a8d7-f0c9a0cef941″] {
width: 320px;
height: 100px;
}
}
@media only screen and (min-width: 728px) and (min-height: 0px) {
div[id^=”wrapper-sevio-e0d3bc50-0aae-47cc-a8d7-f0c9a0cef941″] {
width: 728px;
height: 90px;
}
}

During a recent meeting of the Financial System Council, an advisory body to the Prime Minister, most members supported the new system. They stressed the need for clear rules to ensure exchanges remain accountable even when they outsource critical services. This consensus underscores the panel’s focus on balanced regulation that supports growth while prioritizing safety.

Focus on security after major breach

The renewed focus on security comes in the wake of the 2024 breach of DMM Bitcoin, in which hackers siphoned off about 48.2 billion yen, or $312 million, in bitcoin. The source of the intrusion was identified as Tokyo-based software provider Ginco, which handled much of DMM’s trading systems. Investigations revealed that inadequate segmentation in the software allowed unauthorized access, prompting swift regulatory responses.

Following the incident, Japan enacted new crypto laws that better protect users. The rules demanded that exchanges store customer assets in the country, boost anti-money laundering checks, and permit uses such as making crypto available for in-app payments. These updates, effective immediately post-hack, have already led to improved compliance rates among licensed entities.

Last year, Japan’s Financial Services Agency (FSA) warned five offshore crypto exchanges, Bybit, KuCoin, MEXC Global, Bitget, and Bitcastle, for operating without registration. The warnings emphasized the risks of unregulated platforms to Japanese users, reinforcing the FSA’s role in maintaining market integrity. No fines were imposed at the time, but ongoing monitoring ensures adherence.

Frequently Asked Questions

What Changes Will the FSA’s Custodian Mandate Bring to Japanese Crypto Exchanges?

The FSA’s mandate will require exchanges to partner solely with registered custodians for custody and trading systems, addressing third-party risks exposed by the DMM hack. This ensures all providers undergo FSA vetting, including security audits and capital requirements, ultimately safeguarding customer assets and enhancing trust in the market.

Why Is Japan Pushing for Stablecoin Innovation Alongside Tighter Regulations?

Japan is balancing security with progress by launching a pilot for yen-backed stablecoins involving major banks like Mitsubishi UFJ, Sumitomo Mitsui, and Mizuho under the Payment Innovation Project. This initiative explores faster, cost-effective payments, demonstrating how regulated innovation can drive adoption while the FSA revises laws to cover insider trading in cryptocurrencies.

Japan’s innovation push

Along with its push for stronger security, Japan is also encouraging innovation in digital finance. The FSA has greenlit a new pilot program to test yen-backed stablecoins with three of the country’s largest banks: Mitsubishi UFJ (MUFG), Sumitomo Mitsui (SMBC), and Mizuho. Participants aim to integrate stablecoins into everyday transactions, potentially reducing cross-border payment times from days to seconds.

The project, which was launched under the FSA’s Payment Innovation Project (PIP), is aimed at exploring ways stablecoins can make payments quicker and cheaper for businesses and consumers. Early tests show promising results in efficiency, with banks reporting up to 30% cost savings in simulated scenarios. The FSA’s oversight ensures compliance with anti-money laundering standards from the outset.

The agency also intends to revise the Financial Instruments and Exchange Act in order to bring cryptocurrencies under insider trading laws, like the rest of the world. This alignment will prevent unfair advantages in trading, promoting a level playing field. Financial analysts predict this could attract more institutional investors to Japan’s crypto market.

Follow The COINOTAG on Google News to Stay Updated!    

TAGGED:Crypto ExchangeJapan

Key Takeaways

• Enhanced Oversight: The FSA’s mandate for registered custodians closes gaps in third-party regulations, directly responding to the DMM Bitcoin hack’s vulnerabilities.
• Security Boost: Post-breach laws now require domestic asset storage and stronger AML measures, with data showing reduced risk exposure for users.
• Innovation Balance: While tightening rules, Japan pilots yen stablecoins to foster efficient digital payments, signaling a forward-thinking regulatory environment.

Conclusion

In summary, Japan’s Financial Services Agency (FSA) is fortifying cryptocurrency regulations through the registered custodian mandate, inspired by the $312 million DMM Bitcoin incident and supported by advisory panel consensus. This move, combined with insider trading law revisions and stablecoin pilots, positions Japan as a leader in secure digital finance. As the landscape evolves, investors should monitor these developments for opportunities in a more accountable crypto sector.