Japan Halts Temporarily Two Crypto Exchanges

Eternal Link and FSHO fail to implement anti-money laundering measures.

by Marin Marinov
06 April • 3 min
In Markets

Japan’s financial watchdog said on Friday it has ordered two cryptocurrency exchanges - Eternal Link and FSHO - to halt operations for two months after failing to implement anti-money laundering measures.

The Financial Services Agency (FSA), ordered Eternal Link to cease all virtual currency activities from April 6 till June 5 and FSHO – from April 8 till June 7. FSHO suffered another administrative penalty in March - one-month temporary suspension because of not adequately protecting its customers.

Anti-money laundering (AML) measures

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The financial regulator announced the temporary suspension of Eternal Link and FSHO after investigation of the cryptocurrency exchanges’ activities. Both operators have not taken enough actions for two main AML provisions of the Japanese Act on prevention of transfer of criminal proceeds:

• not proper implementation of the know-your-customer (KYC) procedures, especially the requirement to customers for providing information such as the purpose of trades. KYC procedures are at the heart of AML because they require verifying the identity of clients;

• not proper implementation of procedures about reporting suspicious transaction to FSA.

Japan-based exchanges are required to follow several measures for protection of clients, including:

• secure management of client’s information;

• reliable risk management system;

• effective system for anti-money laundering and counter-terrorist financing (CTF);

• review of business model to check if it is in compliance with AML and CTF measures;

• obligatory notification of suspicious transactions to FSA.

FSA and cryptocurrency

On Friday, FSA also issued a business improvement order to a third cryptocurrency exchange, Last Roots, because it does not protect sufficiently its customers. The watchdog imposed administrative penalties to five crypto-exchanges last month after the theft of around USD 530 million from Coincheck. Two other two crypto trading platforms, Bit Station and FSHO, were ordered to cease operations for at least one month. FSA accused Bit Station of misconduct by using some customer funds for personal transactions while FSHO was penalized because of not properly safeguarding its clients. For now, only FSHO restriction is continued but on the AML considerations.  

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FSA is in the process of reviewing crypto exchanges after the Coincheck hack. In March, the regulator organized a closed-door meeting between financial authorities and academics from around the world, including the UK Financial Conduct Authority, the French central bank's Autorite de Controle Prudentiel et de Resolution, the Hong Kong Monetary Authority, the Bank of Canada, Tokyo University and MIT academics, and other blockchain stakeholders.

The event was promoted as part of FSA’s “Multilateral joint research on financial trading on Blockchains” project, announced in 2017. The project aims to be a forum for international cooperation and research of crypto technology and to promote blockchain development that protects customers and financial stability.

In a separate development, Monex Group has announced acquisition of Coincheck, one of the largest Japanese crypto exchanges.