By David Meyer
September 25, 2017

Japan’s financial watchdog will soon pay very close attention to the internal systems of exchanges for virtual currencies such as bitcoin.

The country’s Financial Services Agency (FSA) said Sunday that it would be putting exchanges under what The Japan Times called “full surveillance” from next month.

That means monitoring internal systems, such as those used for protecting customers’ assets, and possibly on-site inspections.

The scrutiny is a big deal because—thanks to the Chinese authorities cracking down on bitcoin trading in that country—Japan has recently become the largest bitcoin exchange market in the world.

At the start of this month, China banned so-called initial coin offerings (ICOs), which are a trendy way of raising funds that involves giving investors new virtual tokens, rather than shares. Then it banned bitcoin exchanges themselves, leading many traders to migrate to the Japanese and South Korean markets.

The Chinese crackdown led to a crash in bitcoin’s value, although some cryptocurrency analysts think it could be good for bitcoin in the long run, by proving that one country—no matter how large—cannot sink the virtual currency.

So what happens next in Japan, which explicitly legalized bitcoin in April, is important. Exchanges there have until the end of this month to register with the FSA, which has set up a team of 30 people to examine their security practices and the required separation of customer assets from their own.

“We pursue both market fostering and regulation enforcement,” an unnamed FSA official told The Japan Times.

At the time of writing, one bitcoin was worth $3,775—substantially below the $5,000 it hit before the Chinese troubles, but vastly up from the $1,000 it was worth at the end of last year.

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