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2018 – Problem and Promise of Cryptocompliance in Asia

The first ever bitcoin transaction occurred in 2009. Despite bitcoin’s meteoric rise in value since then, from 1 cent per coin in May 2010 to USD 17,900 per coin in December 2017, governments around the world have been extraordinarily slow to respond and implement regulatory regimes. In this three-part post, we look at “cryptocompliance” as an emerging focus of various international regulators in Asia, Europe, and the U.S.

Introducing the Problem

Not only are buyers vulnerable to the astonishing volatility of cryptocurrencies (just last month, the cryptocurrency markets dropped USD 9 billion overnight), but they have been left incredibly susceptible to criminals hacking cryptoexchanges, draining cryptowallets, and infecting computers with cryptocurrency-stealing malware. In late 2017, LexisNexis Risk Solutions Company ThreatMetrix cautioned that cryptocurrencies had become a “prime target for attacks on legitimate transactions.” Earlier this year, independent cryptocurrency news website Coinjournal estimated that an average of USD 9 million per day is being lost to “phishing” and other forms of cybercrime, particularly around Initial Coin Offerings (“ICOs”), which are fundraisings for new cryptocurrency projects. Still, the facts do not lie and it seems that buyers believe cryptocurrencies offer either a safe and secure medium for investment or are nonetheless worth the risk given the staggering returns that some have earned in days gone by. In fact, University of Cambridge estimates that there were 2.9 to 5.8 million unique users of cryptocurrency wallets in 2017, most of them acquiring bitcoin. This despite a vast majority of people not having a clue how the cryptocurrency-enabling blockchain technology actually works.

Admittedly, regulating this collaborative (“peer-to-peer”) and decentralized next-generation technology, which allows market participants to transfer assets across the internet without the need for a centralized third party, is no easy ask. However, authorities appear to have had enough, and there has been a major shift in 2018 towards the study and much-needed regulation of cryptocurrencies.

Japan the first to regulate exchanges; then conducts raids following cyberheist

Fueled by a desire to prevent the technology from assisting terrorist financing, Japan was the first country to regulate digital currency exchanges. After two years of deliberation, Japan amended its Payment Services Act (part of a suite of Banking Act-related legislation) in 2016 to require currency exchange operators to register with its Financial Services Agency (“FSA”), the governmental body that oversees financial activity in the country. Further, the revised legislation required digital currency exchanges to hold, at a minimum, liquid capital of JPY 10 million (USD 91,000) at all times, to implement certain measures to prevent loss or theft of funds or personal information, and to make certain mandatory disclosures to users.

Then in March of this year, Japan’s empowered regulators raided a number of digital currency exchanges in the first action of its kind around the world. The raids followed the world’s largest cyberheist to date, in January of this year, when USD 530 million worth of digital money was stolen from Tokyo-based Coincheck. The raids were conducted by the FSA because of a belief that the exchanges lacked the appropriate systems to prevent money laundering and terrorist financing, and in an effort to shore up consumer protection. The FSA levied a host of punishments following the raids. Two exchanges, which had failed to register with the FSA, were forced to suspend business altogether, while Coincheck was required to repay USD 430 million worth of digital money to investors who lost in the cyberheist.

Japan is still not satisfied. Widely recognized as the world’s largest cryptocurrency market with upwards of 60% of global trading volume, it is still looking to introduce solutions to protect investors. In April of this year, Japanese officials asked a government-led working group comprised of academics, bankers, and lawyers to consider regulating ICOs.

South Korean regulatory overhaul leads to ban on anonymous trading of cryptocurrencies

Commonly considered the world’s third-largest cryptocurrency market, South Korea’s approach towards cryptocurrencies has been unclear at times. Hot on the heels of the rumored criminalization of virtual currency exchanges in December 2017, a move which would have seen South Korea follow in China’s footsteps,Finance Minister Kim Dong-yeon announced in January of this year that the country would not ban or even “suppress” cryptocurrencies. However, also in January of this year, South Korea’s Financial Services Commission forbade local cryptocurrency traders from making deposits into cryptowallets unless those wallets are linked to bank accounts in the traders’ own names and their identities have been verified. This move should help prevent the South Korean market from being abused by money launderers and terrorist financers.

More recently, in March of this year, South Korea banned its own officials from holding and trading cryptocurrencies, which is the first time a government has imposed a virtual currency ban on public officials.

© Copyright 2020 Squire Patton Boggs (US) LLPNational Law Review, Volume VIII, Number 143


About this Author

Richard Gibbon Criminal Defense Lawyer Squire Patton Boggs Dubai

Rich Gibbon is a member of our Government Investigations & White Collar Practice and focuses on white collar criminal defense, regulatory enforcement and internal investigations. He has been based in the Middle East for eight years and has garnered extensive experience counselling boards of directors and senior management across the Middle East and Africa, Levant, Europe, and South Asia through multi-agency, multi-jurisdictional financial crime investigations and enforcement actions. This includes multinational corporates in connection with anticorruption regimes and...

Elizabeth Weil Shaw attorney Squire Patton Boggs

Elizabeth Weil Shaw assists clients primarily with government enforcement actions and inquiries, as well as internal investigations and compliance reviews. Liz has analyzed matters involving investigations by the US Securities and Exchange Commission, Department of Justice and State Attorneys General. She is a contributor to the firm's Anticorruption Blog.