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

The need for cryptocurrency regulation is becoming increasingly clear following scandals and controversies in the industry, according to a prominent US nonprofit research institute.



The Foundation for Defense of Democracies (FDD) released a research <a href="https://www.fdd.org/analysis/2023/02/16/the-underside-of-the-coin-illicit-finance-risks-in-virtual-assets/" target="_blank" rel="noreferrer noopener">paper</a> Thursday titled “The Underside of the Coin: Illicit Finance Risks in Virtual Assets.” 



Authors Richard Goldberg and Alex Levitov laid out six recommendations to close what the institute sees as regulatory gaps existing among virtual asset service providers (VASPs).



VASPs are those businesses or individuals that engage in activities involving virtual assets, such as cryptocurrencies. Examples of VASPs include cryptocurrency exchanges, wallet providers and other businesses that provide virtual asset-related services to customers.



Of the six recommendations, the FDD says the US should first work with the Financial Action Task Force (FATF) to ensure that member states implement the guidance for crypto regulation.&nbsp;



That includes implementing the travel rule and standardizing crypto terminology across foreign jurisdictions. The <a href="https://blockworks.co/news/eu-to-require-exchanges-identify-most-crypto-transactions">travel rule</a> refers to a set of regulations that require financial institutions, including VASPs, to obtain and share certain customer information when transferring funds.&nbsp;



Regulators should consider regulating digital assets through enforcement actions to communicate key compliance messages, the authors wrote. That includes taking an example set by the Treasury Department&#8217;s Office of Foreign Assets Control in the past including allegations against digital wallet provider BitGo and crypto mixer <a href="https://blockworks.co/tag/tornado-cash">Tornado Cash</a>.



Policymakers and the crypto community must also strike a balance between privacy and security when regulating mining pools, mixers and privacy coins, the pair recommended third on their list.



<h2 class="wp-block-heading">Cybersecurity mandates, blockchain analytics tools and more</h2>



Minimum standards for cybersecurity should also be required of VASPs, the authors recommended in their fourth point.



“The failure of VASPs to invest in cybersecurity measures leaves the public vulnerable. The administration and Congress should consider minimum standards for cybersecurity for a VASP to maintain its legal status,” the authors said.



The paper also recommends that the Biden administration collaborates with Congress to provide federal, state, and local agencies access to necessary blockchain analytics tools.&nbsp;



To that end, the authors urge the passing of legislation mandating that exchanges integrate these tools and software into their compliance frameworks. Penalties would then apply to platforms that fail to comply.



In April 2022, the New York State Department of Financial Services <a href="https://www.dfs.ny.gov/industry_guidance/industry_letters/il20220428_guidance_use_blockchain_analytics">advised</a> all virtual currency businesses to use blockchain analytics to bolster their know your customer (KYC)-related controls and screen for sanctions on on-chain activities



Similar measures are being encouraged for adoption by federal regulators.



As a final recommendation, the authors said due diligence regulations should be established for crypto exchanges in higher-risk jurisdictions, including the requirement of user identity verification.



“Exchanges in higher-risk jurisdictions require little or no user identity verification to transfer crypto assets or convert crypto assets to a fiat currency,” the paper reads.



In the coming years, there will be a need for bipartisan leadership to evaluate and weigh the costs and benefits of regulatory and legislative measures, they added.



Ignoring existing problems could lead to a national security crisis, as seen in the <a href="https://blockworks.co/tag/ftx" target="_blank" rel="noreferrer noopener">FTX</a> implosion, they said.



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Washington Think Tank Says Crypto Regulation by Enforcement Is Just Fine

Bessie Liu

<div id="highlights-block_633c8c2384b64" class="highlights">
 <ul>
 <li>Crypto Secure is a color-coded dashboard that can identify where cardholders are purchasing cryptocurrencies</li>
 <li>Users can identify crypto exchanges, measure transaction approvals and declines, and receive insight on risk exposure</li>
 </ul>
 
</div>



In Mastercard’s latest step into crypto, the credit card behemoth is leaning on a recently acquired blockchain analytics company to do due diligence on digital asset merchants.&nbsp;



Mastercard, the company said Tuesday, is leveraging data from CipherTrace, acquired in 2021, to launch a solution that ought to keep Mastercard compliant with crypto regulation. It’s supposed to work by providing actionable information to craft risk profiles of more than 2,400 blockchain-based firms in an effort to determine approved purchases.&nbsp;



The initiative, dubbed Crypto Secure, functions as a dashboard designed to track where cardholders are purchasing crypto products. It also has the ability to identify crypto exchanges, plus measure transaction approvals and declines — as well as provide risk metrics and benchmark ratings for comparison to a peer group of financial institutions.



Ajay Bhalla, president of Mastercard cyber and intelligence, said in a statement that the launch ought to add transparency and trust to the growing business of crypto.&nbsp;



“Trust is our business and with cryptocurrency more intertwined in our daily lives this is an exciting next step in our journey,” Bhalla said.



Mastercard has been actively making strides in crypto over the past few years.&nbsp;



The payments giant recently partnered with cryptocurrency and fiat exchange hi to <a href="https://cms.blockworks.co/mastercard-hi-launch-nft-customized-debit-cards-as-nft-interest-dips/" target="_blank" rel="noreferrer noopener">launch a credit card</a> that allows users to customize their own NFT avatars.



The company also partnered with crypto exchange Binance to <a href="https://cms.blockworks.co/binance-and-mastercard-to-bring-streamlined-crypto-payments-to-argentina/" target="_blank" rel="noreferrer noopener">offer a prepaid crypto card</a> in Argentina and Middle Eastern digital asset gateway Fasset to <a href="https://cms.blockworks.co/mastercard-partners-with-fasset-to-drive-financial-inclusion-in-indonesia/" target="_blank" rel="noreferrer noopener">expand its services</a> to Indonesia. 



These efforts, alongside its expansion in blockchain technology subsidiary companies, include the following:



<ul><li>Finicity, a financial data aggregator company</li><li>Ekata, a global customer identity verification and fraud prevention company&nbsp;</li><li>RiskRecon, a firm working to vet the security mechanisms of counterparty vendors</li></ul>



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MasterCard Is Tracking Where, and How, Cardholders Buy Crypto

<div id="highlights-block_62215e628b1fc" class="highlights">
 <ul>
 <li>Regulated South Korean VASPs facilitated crypto transactions exceeding $1.7 trillion in value for the year ended 2021</li>
 <li>Regulation in the country has been slowly building ever since the FSC prohibited the use of raising funds through ICOs in 2017.</li>
 </ul>
 
</div>



South Korean virtual asset service providers (VASPs) took in substantial net profit last year, amounting to more than 3.3 trillion South Korean won ($2.78 billion) from trading activity, according to a <a href="https://www.fsc.go.kr/eng/pr010101/77445" target="_blank" rel="noreferrer noopener">survey</a> from a unit within the country&#8217;s main financial regulatory agency.



Announced Tuesday, the survey is the first of its kind since VASPs were required to register with the Korea Financial Intelligence Unit (KoFIU) last year under the <a href="https://www.fsc.go.kr/eng/pr010101/76279" target="_blank" rel="noreferrer noopener">amended</a> Reporting and Using Specified Financial Transaction Information Act.



The aim of the survey, KoFIU argues, is to gain a better understanding of the cryptocurrency market based on statistical data provided by individual business operators.



As of the end of December 2021, a total of 29 VASPs had received approval, including 20 &#8220;coin-only&#8221; exchanges, five crypto wallets and four Korean won-based exchanges. That number has since grown to include two more wallets and two more coin-only exchanges, bringing the total number of VASPs operating legally in South Korea to 33.



Of those, Korean won-based exchanges were found to have dominated their coin-only counterparts in terms of market share with a 99.3% grip on domestic operating profits versus 0.7%. Some coin-only exchanges may undergo restructuring, the watchdog said.



Established in 2001, KoFIU is an organization within the Financial Services Commission (FSC) whose role is to monitor and police financial markets as well as implement policy relating to anti-money laundering practices.



During the second half of 2021, total transactions across 24 &#8220;virtual asset exchanges&#8221; amounted to a staggering 2.073 quadrillion won ($1.7 trillion) with an average daily transaction amount of 11.3 trillion won, or $9.4 billion, the survey reads.



Regulation in the country has been slowly building since the FSC prohibited the use of raising funds through ICOs in 2017. Though some local regulators still believe current laws are not yet sufficient to counter money laundering practices, especially as the <a href="https://cms.blockworks.co/korea-stock-exchange-executive-calls-for-more-legislation-as-crypto-volume-catches-up-to-equities-volume/" target="_blank" rel="noreferrer noopener">trading volumes</a> for crypto begin to catch up to equities.



&#8220;Even though the virtual asset market poses high risks for money laundering, the current status on the proportion of AML staff (8%) is inadequate and needs to be improved,&#8221; the unit said.



South Korea ranks 16th in terms of crypto adoption, with 1.9 million people, or 3.79% of its 55.7 million-strong population, owning some form of cryptoasset, according to <a href="https://triple-a.io/crypto-ownership/" target="_blank" rel="noreferrer noopener">data by payments provider Triple A</a>.



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