Japan to require crypto exchanges to bolster internal oversight: source

FILE PHOTO: Men walk toward a sign of Japan's Financial Services Agency in Tokyo August 7, 2014. REUTERS/Toru Hanai

TOKYO (Reuters) - Japan’s financial regulator will require cryptocurrency exchanges to strengthen internal oversight of the so-called “cold wallets” used to store digital money, a source with direct knowledge of the matter told Reuters on Tuesday.

The move by the Financial Services Agency (FSA) highlights the difficulties in ensuring security of virtual currencies, as well as the broader risks for Japan as it aims to leverage the fintech industry to stimulate economic growth.

Following a series security lapses at exchanges last year, the FSA restricted use of less-secure “hot wallets” - where virtual currencies are stored on platforms directly connected to the internet - prompting exchanges to shift to “cold wallets”, storage devices that are not connected to the internet and therefore more secure.

But the FSA has since determined that there are risks of internal theft, even with the cold wallets, the source said. Some exchanges failed to have rules where the person in charge of the storage would be regularly rotated out, the source said, declining to be identified because the information has yet to be made public.

There are 19 registered cryptocurrency exchanges in Japan although that includes some that are not yet operational.

The FSA will order the exchanges it deems to have security lapses to improve their security, the source said. The FSA did not respond to a request for comment.

Japan in 2017 became the first country to regulate cryptocurrency exchanges at a national level. Last year hackers stole $530 million of digital money from a Tokyo-based exchange.

Reporting by Takahiko Wada; Writing by David Dolan; Editing by Muralikumar Anantharaman