Following the recent theft of $530 million worth of NEM from the Coincheck exchange, Japanese regulators have stepped in demanding exchanges tighten up their security procedures.

Exchanges have been instructed to run checks on their own procedures after which the Financial Services Authority (FSA) will conduct hearings with the exchanges. Should those hearings raise any concerns the FSA will inspect the relevant exchanges.

Unsurprisingly, Coincheck has been singled out for particular attention. The FSA has asked the exchange to report back by the 13th February explaining the security breach and indicating what steps they will be taking to prevent any such recurrence.

As of April 2017 exchanges have had to formally register with the FSA though only 16 have so far completed the procedure. Another 16, including Coincheck, have started the process but not been officially cleared.

Currently the FSA does not recommend what proportion of exchange funds should be kept in “cold wallets” – i.e. in offline storage. The stolen NEM came from an exchange “hot wallet”, i.e. connected to the internet.

Japanese Finance Minister Statement

Taro Aso, who as the Finance Minister holds ultimate responsibility for financial services in Japan, issued a statement yesterday that management systems on all exchanges will have to be tightened up. Of the NEM theft he said, “it was a matter for great regret that illicit access caused a massive cryptocurrency outflow from Coincheck on Friday”.

Aso added that it was the FSA’s role to “appropriately monitor cryptocurrency traders to protect users” adding that they had to “weigh the balance between promotion of innovation and protection of users in (supervising) cryptocurrency exchanges”.

This balance is a tricky tightrope for Japan to walk. They want to harness the enthusiasm for cryptocurrencies as a way to propel economic growth, but at the same time protect the economy from destabilisation.  A recent report suggested that the “wealth effect” from Bitcoin ownership was worth an extra 0.3% to Japanese GDP growth.

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