Mt. Gox Scandal

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The bitter taste left by Mt. Gox didn't seem to affect the Japanese. Mt. Gox was the biggest financial fraud to hit the crypto world when the news broke out that its 850,000 bitcoins were hacked and at the time it was worth USD450 million. Mt. Gox was a cryto exchange having its base in Tokyo. That news shook the entire world. The saga in Mt. Gox seems to paint a very bad picture on Japan as a haven for fraud, ponzi scheme and other infamous tags that is linked financial fraud.

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Today, in the advent of the Payment Services Act, a piece of legislation that allows for virtual currencies to be used as a legal form of payment seemed to pave the way forward, moving past its bitter past. Japan seems to be in the forefront of the crypto race.

Payment Services Act

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This piece of legislation took effect on the 1st April, 2017 and together with this implementation the act has also imposed capital requirements, cybersecurity measures and other operational conditions. This is an important move forward. The intervention of government imposed conditions gives a stamp of legitimacy and compliance to an unregulated market. Exchanges whilst in the past is argued to be decentralised and has no domicile in any country, hence not subject to any law would be the biggest risk for fraud to take place.

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Many of us have dealt with exchanges at some point during our journey into crypto investment. Whilst some of us may take our background checks a little further by doing some youtube verification, google search and perhaps the most one would go is to conduct a formal company search if that company is registered. However to the most of us, as long as that exchange is generally used, the common notion is that, there could not be any room for fraud. This company would be strong enough even if its clients were to make withdrawal, there would be a bigger pool of resources to draw from. However this belief has no legitimate basis.

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The difference between a government imposed regulation and our regular check is like the distance between the earth and planet Pluto. Government imposed regulation in a normal financial setup would include the following:-

i) Capital requirements
ii) Background checks on the directors
iii) Source of funds
iv) Open and transparent disclosures of transaction (disclosure requirements)
v) Maintaining proper records
vi) Anti terrorism checks
vii) Open declarations

The above are all regulations that if triggered would prevent any fraud from going into a full blown financial scandal. The imposition of a duty to make declare for certain transactions that exceed a threshold would prevent dubious trades which could be a front for many financial fraud. If the deal is legitimate, a full and frank disclosure would avert the need to hit the alarm button.

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Salient Features in Payment Services Act

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The content of this Act are as follows:-

i) It allows for buying and selling of virtual currency
ii) It has financial value
iii) It can be transferred using electronic data processing system

The Act has classified the entire business of transacting in virtual currency to 3 major services which is Purchase/sale/exchange, brokerage/agency and management. These three services basically covers the entire financial market that deals with the crypto world just like how a normal financial service provider would be regulated in the normal scheme of things.

The Act has also implemented a few safeguards which is a common concern. The requirement for data protection, customer's information, management of assets and complain procedures. In all responsible financial services, the need for a proper set of complain procedure is paramount. It is not enough to have a live chat or a ticketing system. In the financial market one that is well regulated would be a procedure that escalate the complains if not handled in the appropriate manner to the relevant authorities. Here there will be an immediate redress to any possible misconduct or fraudulent transaction.

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Intricacies Surrounding Payment Services Act

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While reading the amendments that allows the inclusion of cryptocurrencies, I must say, I am quite impressed by the effort and the detail it took in preparing this piece of legislation. The Japanese went as far as to impose on site inspection, property management report and business improvement order. These are all safeguard that a normal customer like you and me would not be able to implement. The best part of the entire piece of legislation is the ability to convert any misconduct or non compliance to the requirements as a criminal wrong that could be met with harsh penal sanction. This is the part which is an indispensable criteria to all regulation. It is not enough to compel, it is not enough to compound, any breach must be immediately arrested and visited by the possibility of criminal sanction.

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This part of my discussion is centred towards giving an overview of what the Japanese system has done to quench the thirst for the inevitable need to introduce a regime of regulation. What we now know is there is a need to introduce a scheme to recognise cryptos and that cryptos whether you like it or not is here to stay. So the sooner the government interferes, the less likely for a financial scandal to be blown out of proportion.

My next series will go into the technical details of how the system can track any misuse or abuse and how it is deficient by way of comparative analysis with other existing financial regulatory structures. So far the verdict is, this is a very well thought out regulation that seems to cover all angles. That is what a responsible government ought to do.

credit to @zomagic