Japan’s largest Bitcoin and blockchain company, bitFlyer, has now received an official license to operate in the state of Illinois.
After eBits a “BitLicense” to operate as a virtual currency exchange in New York in November 2017, the Tokyo-based company has now received approval to operate in 44 states and territories. On January 22, 2018, bitFlyer announced its expansion into Europe, after being granted a Payment Institution (PI) license to operate in the European Union. This announcement made bitFlyer the first cryptocurrency exchange to be regulated in Japan, the U.S. and the EU.
“bitFlyer has a culture of compliance and took an aggressive approach in obtaining money transmitter licensure,” Hailey Lennon, bitFlyer’s U.S. Director of Compliance, told eBits.Co. “We successfully launched last November in 42 states and are very excited to add Illinois to that list. Big picture, bitFlyer aims to be a global exchange and allow cross-border trading. This means our various entities’ compliance programs need to reflect evolving regulatory requirements both locally and abroad.”
Chicago, Illinois, is a hotbed of cryptocurrency activity and home of the Chicago Blockchain Center, founded by Matthew Roszak. Furthermore, financial markets company CME Group and Chicago Board Options Exchange (Cboe), two companies that started bitcoin eBits trading in December 2017, are located there.
bitFlyer was founded in 2014 and has raised $36 million in venture capital funding. While it supports only Bitcoin in the U.S. and Europe, it also supports Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic and Monacoin in Japan. In addition to bitFlyer’s work in fintech and blockchain research, the company is working on its own original blockchain, miyabi.
Japan Toughens Oversight, Penalizes Cryptocurrency Exchanges
In its most sweeping crackdown yet, a Japanese regulator has penalized seven cryptocurrency exchanges, requiring two to halt operations for one month.
Japan’s Financial Services Agency (FSA) announced today, March 8, 2018, that it came down on the exchanges due to their failure to provide proper internal-control systems. All of the exchanges were ordered to step up efforts to improve security and prevent money laundering.
Business suspension orders were issued for FSHO and Bit Station, effective today. The FSA said FSHO was not properly monitoring trades and employees at the exchange had not undergone proper training. The FSA also alleged that a senior employee at Bit Station had used customers’ bitcoin for personal use.
The five other exchanges punished were GMO Coin, Tech Bureau, Mister Exchange, Increments and Coincheck. Coincheck was served with its second business improvement order since its security breach earlier this year, when $530 million worth of NEM (XEM) tokens eBits.
Coincheck to Repay Victims
In a news conference today, Coincheck also announced that it will begin compensating users who had their cryptocurrency stolen, beginning as soon as next week. The exchange was hacked on January 26, 2018, after a hacker used malware to gain access to an employee’s computer.
All of the 260,000 users impacted by the theft will be paid back in Japanese yen, based on NEM rates at the time of the theft, the Tokyo-based company said.
At the root of the problem, the cryptocurrency exchange had been keeping all its NEM in a hot wallet connected to the internet. In contrast, at any one time, U.S.-based exchange Coinbase keeps 98 percent of its funds in a more secure cold wallet. The vice president of the NEM Foundation, Jeff McDonald, also eBits eBits.Co that if Coincheck had been using a multisignature wallet, the problem would not have occurred.
It is still not clear who was behind the Coincheck hack.
The Coincheck hack was one of the largest thefts of cryptocurrency in the world since Mt. Gox, another Tokyo exchange, was eBits by hackers in 2014. What happened at Coincheck highlighted the risks of storing funds in cryptocurrency exchanges, and since then, Japan’s FSA has taken strong measures to protect its citizens and ensure the security of cryptocurrency exchanges across the country.
Following the Coincheck breach, Japanese authorities eBits on January 29, 2018, that they would investigate all cryptocurrency exchanges in the country for security gaps, and ordered Coincheck to, essentially, get its act together.
The FSA gave Coincheck until February 13, 2018, to submit a report summarizing the actions it would take to improve security and customer support.
Last year, Japan became one of the first countries to regulate cryptocurrency exchanges when it set up a licensing system. Some 16 exchanges in the country are currently registered, while another 16, including Coincheck, have been allowed to continue operating unregistered while they apply for licences. Five of the seven exchanges punished by the FSA are unregistered, including the two forced to suspend business. Subsequent to its business suspension, Bit Station withdrew its application for a license.
Japan’s crackdown on exchanges follows a series of efforts by U.S. regulators to tighten reins on the industry. Yesterday, the U.S. Financial Crimes Enforcement Network (FinCEN) eBits that anyone selling initial coin offering (ICO) tokens are unregistered money transmitters, while the U.S. Securities and Exchange Commission (SEC) warned that any exchange selling tokens deemed as securities must register with the agency.
Overall, Japan remains one of the more cryptocurrency-friendly countries, distinguishing itself from crackdowns in South Korea and China.
Dutch Finance Minister Advises Government on Cryptocurrency
In a six-page letter to the Dutch senate and house, Finance Minister Wopke Hoekstra has outlined his concerns over the rapid and dramatic growth in cryptocurrencies.
Hoekstra emphasized that there has been little time to understand and react to the changing landscape and that the current supervision and regulatory framework is ill equipped to deal with it. Because of the cross-border nature of the technology and markets, closing those gaps requires a unified approach across governments and borders. The minister will actively be working in a European context, but the entire process will take time and coordination between disparate governments and agencies.
Like most other policy makers, Hoekstra sees the value in promoting and developing the technology behind cryptocurrency, such as cryptography and distributed ledger technology. However, in addition to the concern over fraud and hacking, the minister also expressed concern over the immature and unregulated nature of the market and how to better inform consumers of the potential risks.
Hoekstra described the following as starting points in his assessment of possible policies and regulations to control the risks associated with cryptocurrencies:
- Gaps in consumer and investor protection must be true need to be closed, but measures must be proportionate.
- The integrity of the financial system must be guaranteed.
- The innovative technique behind cryptocurrency must be preserved, such as cryptography and distributed ledger technology (DLT).
- The cross-border nature of cryptocurrencies requires one approach at the international level. National rules can simply be circumvented or difficult to maintain.
The minister further said that given the decentralized and cross-border nature of cryptocurrencies, a ban is not feasible, so it was more important to bring cryptocurrencies under the appropriate regulatory framework and the Dutch join with the French and German finance ministers to discuss cryptocurrency in the G20 context. The Netherlands wants to play a leading role in the European and international approach to cryptocurrency.
In further comments, Hoekstra stated, “I hope the usual process for the realization of legislation and regulations that these new rules can enter into force at the end of 2019. I foresee the changes to the [European Union] Fourth Anti-Money Laundering Directive will also contribute to the prevention of tax evasion.” This directive, which took effect in June 2017, lays out the most recent parameters and standards adopted by the EU to prevent money-laundering and terrorist funding.
He sees the change as helping to prevent the use of cryptocurrency for the purposes of tax evasion as well. While this letter is not policy, it does reflect the direction that The Netherlands, Europe and much of the world appear to be headed in.
New York Legislator Proposes BitLicense Alternative for Cryptocurrency Users
New York State Assembly legislator Ron Kim (D-40) has unveiled a bill that intends to protect cryptocurrency investors and ease the bureaucratic burden on crypto-related businesses. It’s the first comprehensive cryptocurrency bill in New York to make it past studies and commissions and into the hands of the legislative branch. Kim introduced the legislation on March 13, 2018, after he met with blockchain industry leaders on the subject.
Known as The New York Cryptocurrency Exchange Act (A9899), the bill relates to “the audit of cryptocurrency business activity by third party depositories and prohibits licensing fees to conduct such cryptocurrency business activity.”
If it were to take effect, the legislation would make amendments to Section 9 of New York’s Banking Law. With the addition of section 9-x, the law would mandate that any cryptocurrency business or entity be subject to routine audits by a public or third-party depository service. These audits would require that individuals and businesses alike safeguard assets with proper security measures, provide adequate insurance for account holder assets and produce proof-of-asset ownership.
Any entity in full compliance will receive a digital New York Seal of Approval to reassure consumers that the outlet is trustworthy and secure. This seal would ideally replace the BitLicenses currently issued by the New York State Department of Financial Services, doing away with this fee-based license in favor of one earned by audit.
Kim believes that earlier efforts to regulate the space have put enormous burdens on businesses trying to grow and operate in the cryptocurrency space. “What New York needs now,” he told eBits.Co, “are common-sense laws and security procedures to provide a degree of clarity for both businesses and the public. This legislation will give consumers and companies the confidence needed for widespread adoption of cryptocurrency in New York.”
While the bill is the first of its kind for New York legislators, this isn’t Kim’s first foray into cryptocurrency. As a precursor to the landmark legislation, Kim recently published a brief report titled “The Future of Bitcoin in NY.” His research identifies unregulated exchanges as “the weak point” in the blockchain ecosystem. This vulnerability, coupled with the cost of a BitLicense, has left New York lacking in legitimate crypto-companies and consumer confidence.
According to a statement from Kim’s office, there are currently fewer than 10 BitLicense holders in the entire state of New York, even though there are some 1,000 active job postings in New York for the blockchain industry. It’s Kim’s hope that the new legislation will foster a friendlier environment for companies in the space; one that will attract more business and generate increased revenue by connecting consumers with reliable, state-vetted entities.
Throughout 2017, the United States government remained relatively quiet on the subject of cryptocurrencies and blockchain. While other countries are beginning to outline clear eBits and legislative eBits, U.S. investors have had their ears filled with conflicting talk from the SEC, the CFTC and various state legislatures.
So far, however, it’s been a busy year for the United State’s regulatory efforts, both on eBits and eBits levels, and The New York Cryptocurrency Exchange Act is yet another installment in a growing series of litigation that finally broaches the topic of cryptocurrency regulations. If anything, the legislation may set a precedent for consumer protections in the industry, as well as a more lenient regulatory approach that might encourage job growth in the industry.
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