Japan’s Authorities to Require Crypto Exchanges to Strengthen Custody of “Cold Wallets”

In a series of steps to ensure safety and validity of transactions being processed and money being moved by cryptocurrency exchanges, Japan’s Financial Services Agency (FSA) will require all cryptocurrency exchanges to strengthen their internal oversight over their “cold wallets,” which are used to store big chunks of their digital money.

The news was reported on by Rueters in an article posted on April 16. The article claims that the move by the Japanese authorities represents the difficulties in ensuring that cryptocurrencies are not misused for criminal activities and money laundering while Japan is trying to “leverage their fintech industry to stimulate economic growth.”

This push towards a coordinated effort to improve oversight and security is further put into context by a recent research paper published by the Royal United Services Institute for Defense and Security Studies. In this paper, RUSI claimed that countries in the South Asian region faced a major threat to their cryptocurrencies and blockchain sector in the shape of North Korea. Japan was named in that research paper as being a high-risk country for attacks by North Korean hackers, which is a greater incentive for Japan to strive for airtight security and ensure that cryptocurrency exchanges that are doing business in and through Japan have their priorities straight when it comes to protecting their assets.

Japan also became the first country to regulate the cryptocurrency exchanges on a national level back in 2017. However, it also had upwards of $500 million stolen through a hack from a Tokyo based cryptocurrency exchange last year.

Japan has required its cryptocurrency exchanges to stop the use of “hot wallets,” which were basically digital money storage devices that were connected to the internet. After a series of attacks, the FSA asked cryptocurrency exchanges to shift to “cold wallets,” which are not connected to the internet and hence are more secure as it is much more difficult for hackers to tamper with a device that is not accessible over the internet.

However, the FSA had further cause for concern when the requirements for the security of these “cold wallets” were not being met by cryptocurrency exchanges. The FSA required the person in charge of “cold wallets” to be rotated out frequently to ensure that exchanges were able to mitigate the chances of internal theft. Because of these lapses by the exchanges, the FSA plans to further strengthen oversight and also require cryptocurrency exchanges under question to do so as well.

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