Japan’s financial watchdog is looking to put legal curbs in place to prevent foreign cryptocurrency exchanges from taking domestic assets overseas if they collapse, in an effort to protect retail investors.
The Financial Services Agency (FSA) aims to create an “asset retention order” under the legislation governing these exchanges, which would allow it to bar them from transferring assets from Japanese customers out of the country. The idea was discussed on November 7 by a working group under the agency’s Financial System Council.
Currently, such orders can be issued only to registered businesses handling financial instruments—a category that does not include companies like the Japanese arm of Binance, the world’s largest cryptocurrency exchange operator. All seven cryptocurrency exchanges currently regulated under this legislation are based in Japan.
By closing this loophole, the agency hopes to ensure that in the event a foreign crypto exchange fails, investors can quickly receive the same protections as they would with a domestic company. Currently, the FSA’s options in such cases are limited to administrative measures, including improvement or suspension orders, or going through the courts.
The FSA began considering this issue after the 2022 bankruptcy of FTX Trading.
FTX Japan, the exchange’s Japanese arm, had been registered as a financial instruments business to handle products such as derivatives, which allowed the regulator to issue a retention order when FTX failed. But concerns were raised that had this not been the case, the exchange could have sent Japanese assets to the U.S. to compensate customers there.
As of September, there were 29 cryptocurrency exchanges registered in Japan. Those based domestically are required to store client assets offline in so-called cold wallets and to manage customers’ money in a trust under a legal amendment from 2020.
They are also required to manage client assets separate from their own, like brokerages, meaning there is little concern assets they hold would be moved overseas. The proposed legal update will expand protections for Japanese clients even with exchanges based outside the country.
Japan has implemented more legal restrictions on cryptocurrency compared with the US, Europe and the rest of Asia. Still, more overseas players could enter the market given its size.