Japan to Cure Crypto Exchanges Biggest Dilemma

$500 million were lost after a cyber attack on Japanese crypto exchange, coincheck in 2018. The Japanese government after numerous incidents related to cryptocurrency of fraud and theft, have further tightened regulations on crypto exchanges operating within the country.

Last year, the Financial Services Agency (FSA), financial regulating arm of the Japanese government, restricted the use of “hot wallets” for digital currency storage. Hot wallets are connected to the internet for transferring the digital currencies easily, that’s what makes them vulnerable to hacks. The exchanges are now required to do internal scrutiny to protect the ‘cold wallets’ from internal threats. The revision in regulation came after a series of Japanese bitcoin exchanges were hacked. Coincheck was hacked in January 2018 and the hackers managed to take more than 500 million tokens, each valued at roughly 1$. Another exchange Zaif, in September, reported that the company had incurred the loss of 60 million dollars due to hack. The hackers took 5,966 bitcoins from the company’s assets as well as from users hot wallets.

The cold wallets, are still considered safe by the FSA, and a few precautionary rules were set up for them. Cold wallets are considered safer as compared to hot wallets because they are not connected to the internet. However, soon the FSA determined that there are still internal security threats related to the more secure, cold wallets, like thefts from within the company, Man in the Middle (MitM) attacks and physical robberies. The FSA found that most of the exchanges were not regularly rotating the person in charge of the storage as obligated by the law. The law requires the exchanges to keep on rotating the person in charge of the cold wallets so that a MitM attack can be prevented. The people in charge of the cold wallets are often middle management who keep storage devices on them, at all times, increasing the likelihood of internal theft. Reuters reported:

The FSA will order the exchanges it deems to have security lapses to improve their security

The new restrictions would require crypto exchanges to ramp up their security, and they would now be required to have increased internal security to prevent any theft from the inside. The exchanges are directed to disperse their funds into multiple cold wallets, and these wallets must consistently change hands, which will prevent any Man in the Middle (MitM) attacks.A MitM attack is a cyber attack in which the attacker alters the communication between two parties and extracts data from them. While the parties think that they are communicating with each other, they are actually individually communicating with the attacker. The exchanges are also required to run background checks on all employees that they hire, in order to safeguard themselves from internal thefts.

In 2018, a blockchain startup based in Switzerland, reported that they had been hacked and 50 million tokens of their cryptocurrency were stolen from a cold walled stored in a safety deposit box in the local bank. It was speculated to be an inside job, since  safety boxes were present in an uncompromised state.

Japan Bitcoin Relationship

Japan is one of the first country to introduce regulations for cryptocurrency traders by revising the Payment Services Act. Launched in 2017, the regulation requires all cryptocurrency traders operating in the country to register with the Financial Services Agency (FSA). The regulations also recognized bitcoin and other cryptocurrencies as a commodity and means of payment. Since 2017, the country has become one of the freest countries for bitcoin use. Japan right now has 19 registered cryptocurrency exchanges, although the number might also include the exchanges, that are not in service.

However, in March 2019 the FSA held a hearing to consider taking back the decision of considering bitcoin as a form of currency. A member of the FSA’s committee, professor Iwashita, claimed that bitcoin is no longer a currency due to the recent volatility in price, he argued that bitcoin should be renamed as a cryptographic asset. He said:

Bitcoin is not something that I know well but it’s going to go up, it’s not an asset, but there’s an illusion that something is being used here as a currency, and it goes up. As a result, I feel like there is such an actual situation

The Japanese Government’s relationship with bitcoin has been changing for some time now. By being the early adopter of the digital currency revolution, Japan wanted to leverage the success of cryptocurrencies to fuel its economic growth. However, due to the recent drop in cryptocurrency value, the country now has a shifting attitude towards it, but the trend seems to have no effect on the people who are still using bitcoin as a currency in the country.