The Japan Virtual Currency Exchange Association will set a new ceiling on the number of cryptocurrencies to be managed online. This ceiling could be imposed at 10 to 20 percent of total customer deposits. The crypto industry group is eyeing stricter self-regulatory measures for more responsible management of customer assets. Sources suggest that a hacking incident in early September has inspired the step.
New Rules Will Govern Asset Management
According to the new proposal, companies may keep only about a fifth of their customer deposits online. They are currently following regulations devised in July this year. The new rules, along with the amendments, will be implemented once they are certified by the Financial Services Agency (FSA), as the payment services law states.
An Osaka-based start-up, Tech Bureau Corp., operated an exchange called Zaif, which lost over 7 billion yens’ worth of cryptocurrencies in a hack. All the stolen funds were managed online by the company, of which 4.5 billion yens’ worth belongs to customers. One of Japan’s most prominent exchanges, Coincheck, was hacked in January, when it lost over 58 billion yen in customer assets, mostly in the form of NEM tokens. In this case, too, the assets were being managed online.
What Is the Idea Behind the Ceiling?
Cryptocurrency exchanges manage a portion of digital currencies owned by customers online. The rest of the coins are kept offline. However, when the coins are available online, exchanges work like “hot wallets,” and the funds they keep for ensuring a smooth flow of transactions online often get stolen by malicious actors.
Some industry sources suspect that Tech Bureau may have exposed an unusually large portion of their funds to the Internet, which inflated the amount of the hack. Last week, the Japanese FSA suggested that the exchange operator did not give an adequate explanation about the hack that was carried out and why it delayed in informing about the event publicly. The company has been issued three business improvement orders to date. One of the business orders served earlier in 2018 had asked the company to enhance its risk management system.
In such cases, a ceiling could help in dwarfing the amount that crypto exchanges could lose in case of an attack. However, it still cannot be considered adequate protection against such events, and the exchanges must buckle up their security to ensure such events do not take place.