Japan's top financial regulator, the Financial Services Agency (FSA), has completed its on-site inspections of 32 cryptocurrency exchanges operating in the country. The inspections, which began earlier this year, revealed significant operational and security shortcomings across many platforms. This comprehensive review is now expected to lead to a restart of the approval process for new exchange applications—though under stricter oversight.
The FSA’s inspection covered both fully licensed exchanges and those operating as “dealers” under temporary permissions while their applications were reviewed. The regulatory sweep was largely prompted by the high-profile hack of CoinCheck in January, which resulted in the loss of over $500 million in customer funds. That event exposed critical vulnerabilities and prompted a nationwide review of crypto exchange security and compliance.
Key Findings from the FSA Inspections
The FSA released a detailed interim report outlining the issues uncovered during the inspections. Among the most common problems were:
- Inadequate internal control systems that failed to keep pace with rapidly growing trading volumes.
- Lack of specific risk assessments for individual cryptocurrencies.
- Insufficient staffing to properly execute anti-money laundering (AML) measures.
- Limited management oversight and operational immaturity, especially among newer platforms.
Perhaps the most striking finding was the dramatic increase in total assets managed by these exchanges—growing sixfold in just one year. Despite this growth, many firms employed fewer than 20 staff members, resulting in an average asset management load of approximately ¥3.3 billion (around $30 million) per employee.
What This Means for Future Exchange Approvals
Since the CoinCheck incident, the FSA has effectively halted all new exchange approvals. Currently, more than 100 companies—including major banks, IT firms, and securities brokers—are awaiting review. With the inspections complete, the agency is now expected to resume processing applications, albeit with heightened scrutiny.
Prospective exchanges should anticipate a more rigorous evaluation process, including:
- Thorough validation of business plans and operational models.
- On-site reviews of internal control and cybersecurity systems.
- Enhanced checks on AML and customer protection protocols.
The FSA aims to balance market growth with consumer safety, recognizing both the economic potential and risks associated with cryptocurrency trading.
Frequently Asked Questions
What triggered the FSA’s inspections of crypto exchanges?
The inspections were largely prompted by the January 2024 hack of CoinCheck, which exposed serious security flaws and inadequate safeguards across the industry. The FSA launched the reviews to assess systemic risks and improve oversight.
How many exchanges were inspected?
The FSA conducted on-site inspections of 32 cryptocurrency exchanges. Only 7 were fully licensed; the rest were operating under “dealer” status while their applications were pending.
Will the FSA now approve new exchange applications?
Yes, the agency is expected to resume the approval process. However, applicants will face stricter requirements, especially in areas like internal controls, risk management, and AML compliance.
How many companies are currently awaiting approval?
More than 100 firms are in the queue, including well-established financial institutions and technology companies.
What were the main problems found during inspections?
Common issues included understaffing, poor risk assessment practices, weak internal controls, and inadequate anti-money laundering measures.
Can existing exchanges continue operating?
Yes, fully licensed exchanges may continue operations, but all platforms—including those with dealer status—must address the deficiencies identified by the FSA.
The Road Ahead for Japan’s Crypto Industry
Japan has long been a pioneer in cryptocurrency regulation, aiming to foster innovation while ensuring market integrity and investor protection. The resumption of exchange approvals—under a strengthened framework—signals a maturing approach to digital asset oversight.
For businesses seeking to enter the market, now is the time to strengthen compliance functions and prioritize security. Those that proactively address regulatory expectations will be better positioned for success. 👉 Explore compliance strategies for crypto businesses
The FSA’s actions reflect a global trend toward more assertive cryptocurrency regulation. As the market evolves, so too will the standards that govern it—making ongoing adaptation and vigilance essential for all industry participants.