Japanese exchanges must provide customer information with transfers, according to new law

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Japan is planning new laws requiring digital asset exchanges to share customer information in a new bid to combat money laundering. The new rules would bring digital assets under the umbrella of existing money transfer or “travel” rules that cover transactions in existing national currencies.

Criminal penalties can be applied to exchange operators who fail to provide customer information such as names and addresses when executing transfers with other exchanges. Advice and warnings would be sent before any sanction. The new law referred to as the “Law on the Prevention of the Transfer of Proceeds of Crime” will come into force from May 2023.

Regulators in Japan pay particular attention to stablecoins. Unlike earlier digital assets like Bitcoin, stablecoins are designed to be used primarily on exchanges, so traders can “park” value and make quick transfers between other exchanges and countries. The distribution of new stablecoins will be subject to registration under the country’s fund settlement law.

Amendments will also be made to the Foreign Exchange and Foreign Trade Act and the International Terrorist Assets Freeze Act to add stablecoins to the list of regulated assets. It also aims to prevent trade between Japan and countries under economic sanctions, a list that currently includes some activities in North Korea, Iran and Russia. Japan is primarily concerned about funding transfers associated with nuclear development in North Korea and Iran.

Japan is aligning its digital asset laws with those of other major trading jurisdictions such as the United States, EU countries, and Singapore. They are based on the recommendations of the International Financial Action Task Force (FATF) in 2019, which sought to curb the use of digital assets to launder the proceeds of illicit activities.

Bring digital asset exchanges into compliance with existing laws

Over the past few years, governments around the world have attempted to force the digital asset industry to behave more like the traditional financial system. Transfers between banks and exchanges are already closely monitored by SWIFT and Japan’s own “Zengin” system for transfers, and those who engage in money laundering initially saw digital assets as a means of circumventing these regulations.

For a while, it worked – blockchain records can be permanent and public, but investigators had to devise new ways to track money movements and unmask users. The sometimes ambiguous legal status of digital assets has also slowed down the process. However, since exchanges often deal with large transfers and eventually have to interact with the traditional financial system when users cash in/withdraw, it is easier for governments to subject them to the same regulations as existing platforms.

The FATF published a report on “so-called stablecoins” in mid-2020, following a request from finance ministers from the G20 group. Other digital assets often deter those looking to move large sums of money around the world unhindered due to their price volatility. However, stablecoins are designed not to fluctuate in value, making them essentially as useful as the fiat currencies they represent, as long as they are able to maintain a fixed price.

Some of these price pegs have proven to be notoriously fragile, primarily when their values ​​are determined by trading algorithms rather than actual assets (like the doomed LUNA) or baskets of actual assets whose exact contents are unknown ( like Tether).

The recommended regulations for stablecoins are more about tracking transfers than supporting or governing each coin. This is because users retain some trust in the value as long as it is still functioning, and transfers in and out of stablecoins can be completed in seconds. For regulators looking to prevent financial crimes, it is less important for gambling merchants to lose their money than to investigate illicit activity in the real world.

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