The Japanese financial regulator issued a report from its study group meeting on virtual currency exchanges, which sets out requirements “as a precondition of the proper principle of self-responsibility”.
The report addresses a range of areas such as risks of virtual currency leakage, coin listings, financial and price disclosures, advertisement prohibitions, margin trading, initial coin offerings (iCOs) and custodial services for virtual currencies.
The FSA said that cryptocurrency service providers will be expected to follow these rules either by themselves or under the guidance of a self-regulatory organisation.
The report centres on three main areas, namely: issues with virtual currency exchange service providers, virtual currency margin trading and ICOs.
The proposed first rule, on crypto leakage, states:
"Where private keys of customers’ deposited virtual currency are managed online… service providers [are required] to maintain net assets and funds for reimbursement of the same or greater amount. The funds must consist of the same types as the deposited virtual currency."
Second, service providers are also required to "develop [a] framework to entitle customers to [a] statutory lien that secures their claim to deposited virtual currency” and they must also disclose their financial statements".
To ensure proper business operations, they must disclose information on trading prices.
They are also prohibited from using advertisements or promotions that encourage speculative trading.
Further, they must follow the rules established by self-regulatory organisations.
In addition, virtual currency service providers are prohibited “from dealing in virtual currencies that could impede user protection or proper and reliable business operations".
The last requirement under the first category is for them to notify the FSA of “each change of a line of virtual currencies in advance”.
On margin trading, the first proposed rule states that a registration requirement for “foreign exchange margin trading (forex trading)” will be imposed on cryptocurrency service providers offering margin trading.
The same code of conduct “such as the prohibition of unrequested solicitation” will also apply.
Second, a limit will be imposed on each cryptocurrency’s leverage ratio “based on [the] actual virtual currency price fluctuations”.
Service providers will also be required to explain the risks specific to cryptocurrencies and set minimum margin amounts.
Finally, crypto credit will follow similar rules as margin trading since they have similar functions and risks.
In respect of ICOs, the report clarifies that soliciting investments by funding virtual currency is subject to financial regulations.
Further, in light of the high transferability of ICO tokens and risks to investors, Regulators of investment-type ICOs will have to provide certain public disclosure when soliciting from 50 or more investors, apply unfair trading regulations and brokers/dealers will be regulated in the same manner as securities firms.
As to other types of ICOs, virtual currency exchange providers that deal in ICO tokens should provide certain information, including in respect of the feasibility of the project.
The report also outlines requirements in respect of unfair acts in virtual currency spot trading, rules for custodial services for virtual currencies and transitional treatments associated with the introduction of new registration requirements.
Finally, the report proposes a change in the name of the defined legal term from “virtual currencies” to “cryptoassets” in light of international trends.
The FSA submitted a bill to the Diet to amend its regulatory framework applicable to CTPs based on the findings in the report.