Sebastian Sinclair

Japan is expected to introduce new anti-money laundering measures designed to better track crypto transactions as it continues to move in lockstep with other nations across the region.



The country’s cabinet intends to implement the new measures come June 1, which would see the enforcement of what’s known as the travel rule, <a href="https://japantoday.com/category/crime/japan-to-enforce-crypto-anti-money-laundering-steps-from-june" target="_blank" rel="noreferrer noopener">Japan Today</a> reported on Tuesday.



It requires financial institutions to pass certain information between them, with the goal of transaction traceability — to prevent, detect and prosecute money laundering and other financial crimes.&nbsp;



It also requires the names, addresses and other financially identifiable data to be included in each step of a given transaction. The rule was later adapted for virtual asset service providers.



An intergovernmental organization, known as the Financial Action Task Force (FATF) — responsible for enforcing the rule — found Japan’s previous attempt at adoption in 2021 to be deficient.



Japan has continued to ratchet up its standards on crypto regulation for roughly two years in response to criticisms levied against it. Those criticisms also included the FATF’s public shaming of Japan’s &#8220;<a href="https://asia.nikkei.com/Business/Finance/Money-laundering-watchdog-gives-Japan-a-failing-grade" target="_blank" rel="noreferrer noopener">inadequate progress</a>&#8221; on the issue when it came to digital assets.



As a result, a significant investor protection bill was approved by the <a href="https://blockworks.co/news/japan-passes-legal-framework-for-stablecoins">Japanese legislature</a> in June of last year, establishing a legal structure for stablecoins and defining them as digital currencies.&nbsp;



Under the law, the issuance of stablecoins is exclusively reserved for recognized financial entities, including registered banks, money transfer agencies, and trust companies.



Around the same time, the country also sought changes to its <a href="https://blockworks.co/news/japan-to-revise-foreign-exchange-law-targeting-crypto-over-sanctions-evasion">Foreign Exchange Act</a> in a bid to clamp down on crypto transactions thought to be making their way into the hands of sanctioned Russian nationalists.



Coincidentally, as Japan strengthens its AML rules for crypto, Hong Kong is anticipated to <a href="https://blockworks.co/news/hong-kong-to-lift-crypto-ban">ease restrictions</a> on virtual asset providers previously barred from serving retail crypto investors.



Though, like Japan and much of the regions across Asia, Hong Kong and others continue to advance more aggressive policies in the wake of a brutal year for digital assets and the demise of FTX — a particular <a href="https://www.bbc.com/news/business-63898729" target="_blank" rel="noreferrer noopener">sore spot</a> for <a href="https://blockworks.co/tag/singapore" target="_blank" rel="noreferrer noopener">Singapore</a>.



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Japan to Tighten Crypto Anti-Money Laundering Rules Next Month

<div id="highlights-block_61df539252f26" class="highlights">
 <ul>
 <li>The Hong Kong Monetary Authority is seeking feedback from the public on how it should regulate cryptocurrencies and stablecoins</li>
 <li>The banking authority is considering a risk-based approach to payments-related stablecoins, which it deems as a risk to financial stability</li>
 </ul>
 
</div>



Hong Kong&#8217;s central bank is seeking feedback from the public on new regulatory measures aimed at curbing what it calls &#8220;material risks to financial stability&#8221; posed by cryptocurrencies and stablecoins.



The Hong Kong Monetary Authority (HKMA), the country&#8217;s central banking institution, released its <a href="https://www.hkma.gov.hk/media/eng/doc/key-information/press-release/2022/20220112e3a1.pdf" target="_blank" rel="noreferrer noopener">discussion paper</a> on Wednesday outlining its stance &#8220;in the face of growing adoption&#8221; of the nascent asset class.



The paper claims the current market size and trading activity, from a systemic viewpoint, does not pose &#8220;an immediate threat&#8221; to the global financial system. 



The bank does recognize, though, the increase in institutional adoption of crypto — as an alternative or complement to that of traditional asset classes — represents an intensifying bond with mainstream finance.



In May 2021, Hong Kong announced it would be implementing a licensing regime aimed at virtual asset service providers, or VASPs, by amending its existing anti-money laundering and counter-terrorism laws. 



Those changes are in line with the intergovernmental agency Financial Action Task Force&#8217;s (FATF) request that financial entities and crypto business services dealing in crypto be regulated under a &#8220;<a href="https://www.fatf-gafi.org/media/fatf/documents/recommendations/Updated-Guidance-VA-VASP.pdf" target="_blank" rel="noreferrer noopener">risk-based approach</a>.&#8221;



It is from the FATF that Hong Kong is drawing up further regulatory measures while seeking to balance financial innovation against regulating illicit activity, per the paper.



<h3>Stablecoins</h3>



HKMA&#8217;s concerns mainly center on &#8220;payments-related stablecoins,&#8221; which it deems a risk that if left unchecked has the potential to severely undermine public confidence in its ability to monitor and regulate.



<a href="https://cms.blockworks.co/?s=stablecoins" target="_blank" rel="noreferrer noopener">Stablecoins</a> are types of cryptocurrencies whose values are generally pegged to certain commodities, such as gold or traditional currencies like the US dollar. Their use for payments within certain circles has continued to grow since their inception in 2014 and began being picked up in earnest by late 2017. There are $172 billion in stablecoins circulating today, <a href="https://www.coingecko.com/en/categories/stablecoins" target="_blank" rel="noreferrer noopener">according to CoinGecko</a>.



<blockquote class="wp-block-quote">&#8220;The rapid development of crypto-assets, particularly stablecoins, is a topic of keen attention in the international regulatory community as it presents possible risks regarding monetary and financial stability,&#8221; said HKMA&#8217;s chief Eddie Yue in a <a href="https://www.hkma.gov.hk/eng/news-and-media/press-releases/2022/01/20220112-3/" target="_blank" rel="noreferrer noopener">statement</a> on Wednesday.</blockquote>



The bank&#8217;s paper identifies ten major areas of concern stablecoins pose, including disrupting payment integrity, banking stability, creating a currency substitution and causing settlement risks, among others.



In response, HKMA will seek to &#8220;apply regulation to tackle the key risks&#8221; that it classifies as being posed by these types of crypto assets and is now seeking to gauge public feedback.



“We look forward to hearing the feedback from stakeholders and will draw up a risk-based, pragmatic and agile regulatory regime on this front,” said Yue.



Members of the public and the industry have been invited to submit their responses by email no later than March 31.



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