The Japanese FSA is taking action again.

The Japanese regulatory authorities have sent another signal that in the future, cryptocurrency exchanges cannot just say that our assets are safe; they must also prepare real cash reserve funds for compensation. If something goes wrong, you have to be able to pay up.

Although Japan has long required exchanges to keep user coins in cold wallets, it has not specifically mandated that they set aside funds to address unexpected losses from hacks, system failures, and other incidents. In the past, it was generally assumed that issues would be dealt with as they arose, but now the FSA is clearly unwilling to continue gambling on luck.

DMM Bitcoin was hacked for over 300 million dollars last year, making regulators aware that risks do not only come from the exchanges themselves; outsourced teams can also betray you. Therefore, the FSA plans to legislate two requirements:

1. The exchange must set aside a liability reserve fund, truly ensuring that it can compensate for lost coins.

2. Custodians and technical partners must also register in advance to avoid vulnerabilities from other companies that the platform has to pay for.

If this step is truly enacted into law, it will significantly raise the operational thresholds for Japanese exchanges. This also means that in the future, the likelihood of users being left in the lurch after Japanese exchanges go bankrupt, run away, or get hacked will decrease substantially.

In my opinion, this is a typical path for Japanese regulation towards mature financialization that does not hinder innovation but aims to minimize the probability of explosive failures.

In the past few years, the crypto industry has faced too many blowups, too many financial holes, and too many losses that can't be afforded, leading regulators to treat Web3 as a high-risk financial sector.

The new regulation from FSA this time is to push cryptocurrency exchanges towards bank-level requirements.

Of course, this will increase compliance costs and will also wash away a batch of small platforms that cannot withstand the costs.

But in the long run, the stricter the regulations and the higher the requirements, the more resilient the remaining exchanges will be, and users will be more willing to invest their money.

#FSA # Liability Reserve Fund #Investor Protection