The Japan FSA is going to take 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 a reserve fund of real cash for compensation. If something goes wrong, you need to be able to pay up.

Although Japan has long required exchanges to keep users' coins in cold wallets, it has not specifically required them to set aside a sum of money to deal with unexpected losses from hacks, system failures, and other incidents. In the past, everyone assumed they would deal with issues as they arose, but now the FSA clearly does not want to continue gambling on luck.

DMM Bitcoin was hacked for over $300 million last year, which made regulators realize that risks do not only come from the exchanges themselves; outsourced teams can also let you down. Therefore, the FSA plans to legislate two requirements:

1. The exchange must maintain a reserve fund for liabilities to ensure that it can compensate for lost coins.

2. Partners such as custodians and technology providers must also register in advance to avoid vulnerabilities from other companies that the platform would have to cover.

If this step is truly legislated, it will significantly raise the operational threshold for Japanese exchanges. This also means that in the future, the probability of users being left out in the cold after Japanese exchanges go bankrupt, run away, or get hacked will greatly decrease.

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

In the past few years, the cryptocurrency industry has experienced too many explosions, too many capital holes, and too many losses that cannot be afforded, leading regulators to treat Web3 as a high-risk financial industry.

The new regulation from FSA this time pushes cryptocurrency exchanges towards bank-level requirements.

Of course, this will increase compliance costs and will also eliminate a number of small platforms that cannot bear the costs.

But in the long run, the stricter the regulations and the higher the requirements, the more robust the exchanges that remain will be, and users will be more willing to put their money in.

#FSA # Liability Reserve Fund #Investor Protection