The collapse of Mt. Gox put regulators around the world on notice that digital assets could no longer be ignored. There is no regulator that got that message loud and clear more than the Japan Financial Services Agency. In today’s episode, Chengyi Ong, Head of Policy (APAC) at Chainalysis has an insightful discussion with Ryosuke Ushida (Chief FinTech Officer, Financial Services Agency of Japan) about the pioneering role their agency had in crypto regulation and how Japan was able to successfully strike a balance between innovation and risk mitigation.
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Public Key Episode 167: Japan’s Groundbreaking Journey in Crypto Regulation
The collapse of Mt. Gox put regulators around the world on notice that digital assets could no longer be ignored. There is no regulator that got that message loud and clear more than the Japan Financial Services Agency.
In today’s episode, Chengyi Ong, Head of Policy (APAC) at Chainalysis has an insightful discussion with Ryosuke Ushida (Chief FinTech Officer, Financial Services Agency of Japan) about the pioneering role their agency had in crypto regulation and how Japan was able to successfully strike a balance between innovation and risk mitigation.
Ryosuke shares the evolution of Japan’s holistic digital asset strategy, involving cross-agency collaboration to seamlessly integrate regulatory and innovation goals.
He highlights stablecoin regulation, international harmonization of crypto policies and tackling security concerns stemming from cyber threats, while showcasing Japan’s multifaceted approach to fintech and digital assets.
Quote of the episode
”Our crypto journey started in 2014. So at the time we had a bitcoin exchange named Mt. Gox in Tokyo. So surprisingly more than 70% of Bitcoin transactions were taking place in that exchange…and then of course regulators, JFSA didn’t know that at all. But suddenly nearly 500 million US dollar equivalent of Bitcoin was lost….So that’s why we created a new regulatory framework for crypto asset service providers in 2016. – Ryosuke Ushida (Chief FinTech Officer, Financial Services Agency of Japan)
Minute-by-minute episode breakdown
2 | Ryosuke Ushida blockchain journey and leading innovation at JFSA
4 | The fall of Mt. Gox that lead to early adoption of crypto regulations in Japan
7 | The benefits and challenges of being an early regulator in digital assets
10 | Japan’s self regulation and public private partnerships to scale compliance in crypto
14 | How Japan could leverage blockchain for cross-border payments and IP transfer
19 | Prioritizing consumer and national security in the wake of large crypto hacks
24 | Japan Fintech Week: A global gathering of innovation and networking
28 | Stablecoins, AI and global regulatory and financial crime challenges in crypto
33 | Crypto Trends: Overused words, regulatory priorities and fintech aspirations
Related resources
Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.
- Website: JFSA: The Financial Services Agency is a Japanese government agency and an integrated financial regulator
- Guidance: Joint Statement on Cryptocurrency Thefts by the Democratic People’s Republic of Korea and Public-Private Collaboration
- Event: Japan Fintech Week 2025 (highlights coming soon!)
- Blog: Nobitex, Sanctions, and The $90 Million Exploit: A Window into Iran’s Largest Crypto Exchange
- Blog: The Security Risks of Stablecoins: How Hackers Exploit Centralized and Decentralized Issuers
- Announcement: Chainalysis and Aptos Foundation Partner to Increase Trust and Security
- YouTube: Chainalysis YouTube page
- Twitter: Chainalysis Twitter: Building trust in blockchain
Speakers on today’s episode
- Chengyi Ong *host* (Head of Policy (APAC), Chainalysis)
- Ryosuke Ushida (Chief FinTech Officer, Financial Services Agency of Japan)
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Transcript
Chengyi
Hello and welcome to another episode of public key. I’m your host for this episode. Chengyi Ong, head of APAC Public Policy here at chainalysis Today, I’m privileged to be joined by Ryosuke ushida, who is Chief FinTech officer of the Japan Financial Services Agency, as well as co chair of the virtual asset contact group of the Financial Action Task Force. Ryosuke, welcome to the podcast.
Ryosuke
Thank you very much Chengyi for having me at this very famous podcast. So I am Ryosuke, a Chief Fintech Officer with Japan Financial Services Agency, and I’m very happy to share Japan’s journey to regulate crypto and stable coin, and they’re also happy to share international context as a co chair of Financial Action Task Force, virtual asset contact group. Thank you very much. Thank you.
Chengyi
We’re so excited about that, because Japan really is something of a lighthouse jurisdiction when it comes to digital assets and web three policy and your agency, of course, sits squarely in the middle of that. So we know the FSA. The jfsa is an integrated regulator. It looks across banking, insurance, securities, crypto, and obviously, you know, through people like you, it’s a very active voice at international fora with a lot of clout. Can you perhaps tell us a little bit more though about your role and your team? So what does chief FinTech officer do? What’s the mandate? How did you find yourself in this space?
Ryosuke
Sure. So as you mentioned, FSA is an integrated regulator that’s regulating all types of financial industry and the crypto and the digital asset space each one of that, and then we are in charge of both supervision and the enforcement, as well as planning of new policy and legislation. So in the sense, we are integrated regulators, and then as a chief FinTech officer, and basically, I am in charge of innovation and the FinTech policy. So when we say innovation technologies like blockchain and the AI often come to these financial services. So my role is to, you know, strike a balance between innovation and then risk mitigation that new technologies could bring, and then we aim to be full innovation regulators So, and then I am contributing to that
Chengyi
from that perspective. And how did you find yourself in this space? How does one become chief FinTech officer?
Ryosuke
So I joined the FSA back in 2010 and then I have been doing kind of conventional regulators job, like, you know, supervision of banking sector. But in 2019 and I was dispatched to Georgetown University in Washington, DC, and then spent two years as a blockchain researcher. So my first academic paper is how to regulate defi and then Dao, because, you know, they have some centralized aspect, and after research, I came back to Tokyo in 2021 then since then, I’ve been taking care of technology and innovation policy.
Chengyi
That’s great. The questions around defies and daos like those are obviously practically, very challenging, even conceptually, they’re very challenging. So it’s good to hear that you’ve been diving deep into that area of work, thinking back, you know, when I first, when I first started in regulation, there was no such thing as a chief FinTech officer. And now it’s not uncommon to see like innovation focused functions in different central banks and regulators really like targeted exactly, as you said, at trying to strike the right balance between driving innovation in quite an active way and balancing the, you know, the risk implications on the back end. And I think that’s something that there’s a tension that that that really demands a particular mode of engagement between policy makers and the and the industry, and I think we see that very prominently within the crypto and digital asset space. So, you know, I’d like to start by asking you a little bit about Japan’s policy journey in crypto. Obviously, Japan was an early adopter of Bitcoin, but also, in a way, an early adopter of crypto regulation. You know, you guys, the gfsa, was one of the first regulators in the world to implement crypto regulation, not just for AML purposes, but also for consumer protection objectives, and that was years before other regulators started to act. Can you give us an overview of how that happened, of the of the policy journey so far,
Ryosuke
all right, so and our crypto journey started in 2014 so at that time, we had Bitcoin exchange named the month in Tokyo. So it. Surprisingly, more than 70% of Bitcoin transaction was taking place in that exchange operated by French guy. And then, of course, legally, as FSA didn’t know that at all, but suddenly, nearly 500 million, yes, there are equivalent of Bitcoin was lost. And then, of course, it had a huge Investor Protection implications as well as AML safety implications. So it’s a kind of wake up call for us. And then right after that, Financial Action Task Force issued some guidance to require jurisdictions to introduce licensing regime for crypto crypto service providers. So that’s why we created new regulatory framework for crypto service providers in 2016 so we are one of the early adopter of crypto, and then crypto regulation, and then, because we had, we learned a harsh lesson from that incident. So but in any case, it eventually was good for us to develop a comprehensive regulatory framework for digital asset so even after introducing fast regulation into 2016 we had another high profile incident like coincheck, among others. So we decided to tighten to enhance our regulation for Investor Protection back in 2019 so we introduced so called, a cold wallet requirement to reserve a customer’s asset in an offline environment. So at the same time, we saw a bunch of fraud rent Ico cases, so we felt we need a, you know, capital market regulation for specific types of token. So we amended our security regulation, which is financial instrument and the Exchange Act, in 2019 and they introduced security token regulatory framework. And then next revision is in 2022 when we introduced a stablecoin regulatory framework, as well as introducing a terrible rule requirement. So with that, I think, you know, we had, you know, good regulation for crypto asset and the stable coins and then tokenized securities. So I’d say Japan is one of the countries which already have a good regulatory framework,
Chengyi
absolutely. And many of those guardrails that you put in place, things like the cold wallet thresholds, those have become really a model for other regulators that have also looked at Japan’s experience and then borrowed elements of that when they built their own frameworks. I think sometimes people think of regulation as a single, monolithic thing, like an act that comes out and regulations that supplement it. But I love this story, because this is really, you know, it showcases regulation as something that is living and responding to the risks of the day, and the regulatory journey is never really over. But So question for you, jfsa was, you know, an early mover, in many cases, a pioneer in coming up with these requirements. What do you think some of the advantages and drawbacks were of being such an early mover in this space?
Ryosuke
That’s a great question. I think one of the positive aspects is that, you know, as you mentioned, you know, when we introduce some requirement that might be referred by regulators, colleagues across the globe, and then, you know, we could contribute to the kind of developing international standard and practice for crypto supervision and then regulation. But downside is that, as this industry and the technology is changing really fast as a first mover, maybe some of our regulatory climate might not be insufficient, given that, you know, fast changing environment. So for example, we so in 2016 we decided to regulate crypto services under the Payment Services Act. Because, you know, we thought something like Bitcoin would be used as a means of payment. But for now, it’s more for kind of investment asset. So now we are, you know, discussing how we can potentially enhance capital market regulation like other countries, like EU, had to prevent insider trading and the market manipulation. So, yeah, it seems, you know, many jurisdictions, you know, looking at security. And the capital market regulation, to regulate the crypto so, you know, Japan, in some countries, you know, moving on the slightly different direction, but it’s, you know, we have to do something more. But it’s not necessarily bad, you know, we can, you know, share the kind of knowledge of each countries. And then, you know, potentially, you know, we can improve our regulatory framework, you know, in a global manner. So, yeah, it’s not bad, but, you know, we need more kind of research and work in the future.
Chengyi
I think, you know, that’s a really good point. I’m based in Singapore, and here, crypto is regulated under the payment services act as a digital payment token. And you know, the services around that are also, you know, regulated accordingly. And one of the challenges there is, then, you know, the concept of market abuse and market manipulation is not really as much of a thing in payments versus in capital markets. So how do you best transplant some of those you know, necessary measures over into the act? Or do you shift crypto into into securities law? Like, how do you want to tackle that? Because there’s no single perfect way of doing that. There’s always trade offs and frictions either way.
Ryosuke
So, yeah, sorry. So yeah, right. So there, you know, variety types of tokens out there. So 10 years ago, it’s mainly Bitcoin and then Ethereum, but there are so many locally issuing tokens as well as internationally issued tokens, so it’s, you know, we have to think carefully about the characteristics of each token, and then, you know, appropriate regulatory climate should apply To each service providers.
Chengyi
Yeah, that makes total sense. I think it’s very sound. And then it just requires, you know, just a lot of grunting through the specifics of, you know, the characteristics of each token or the functions of each token and what should apply. So given you know how quickly the crypto market evolves, and given that tokens can have sort of more than one function, like, Do you have any thoughts on how regulators can sort of future proof their regulation or enhance the longevity of the rules that they put out? You know, with with this rapid evolution of the crypto sector in
Ryosuke
mind, wow, it’s very difficult question. So, um, it’s almost impossible, at least for me, to kind of envisage the future development of crypto ecosystem. If I know that, maybe I will do startup, maybe what matters for regulation and for regulators, it’s to be agile and flexible as much as possible. So one of the example in Japan, you know, we amend our relevant law and guidelines almost every year. So it’s a very time consuming and resource intensive because, you know, the number of bills that FSA can submit, yeah, is quite limited. But you know, crypto and stable coin is one of our top priority and therefore, you know, we are committing to develop sound regulatory environment for this industry. So that’s why we spent a lot of time and the human resources for this area. That’s one thing. Another aspect is private public partnership. So in Japan, we designate self regulatory organization, and to, you know, self regulate crypto industry. So there are many self regulations that applied to VASP. So it’s, it’s not, you know, kind of mandatory requirement, but still, a lot of service providers are comply, trying to comply with those regulation. And then, you know, I mentioned that there is no regulation to prevent inside that trading at the low level, but that regulation has those requirements so, and that’s one of the examples that you know private sector initiatives are complementing public sector policy,
Chengyi
yeah, that’s a great that’s a great example of how, in a way, you can have standards without necessarily having to encode everything in law. And that’s a great approach to regulation. Can I take a Can I shift a little bit so you. Know, there’s the regulatory picture here, but as I understand it, you know, through the a lot of the work that you do, the FSA also has an interest in supporting digital innovation. Can you tell us a bit about, you know, what initiatives you have underway when it comes to digital assets and crypto?
Ryosuke
So digital asset and then wave three, it’s one of the priorities for Japanese government. So, I mean, it’s not only FSS policy, but, you know, it’s a, you know, cross governmental initiatives that, you know we will, we try to make the most out of the blockchain innovation. So that’s why Cabinet Office and then policy makers and then relevant ministries, and of course, industry experts are working together to make that happen. Because, you know, Blockchain is changing many aspects of our society. So you know, financial side will be taken care by FSA. But you know, for example, tax policy is handled by Ministry of Finance. And then technology aspect is, you know, covered by digital agency. And if it’s, you know, entertainment like IP, so Ministry of Culture might involve in this discussion. So it’s, you know, coordination across agency is mandatory to achieve sustainable innovation. Therefore, Cabinet Office is, you know, leading these initiatives. And the question makers has a clear views on how, you know, we can develop these sectors. And then, you know, financial part is taken care by FSA. So FSA is contributing to that, you know, industry and then government initiatives from financial regulators perspectives,
Chengyi
that’s really cool. So as you do this, as all these agencies work together, is there a particular end goal, or a vision of the end state of the digital asset sector or the web three ecosystem that you’re working towards is so that clarity of the of the of the goal.
Ryosuke
I think there’s no kind of strictly defined goal as a government, but it’s a maybe personal view. But you know, from finance perspectives, you know blockchain technologies could solve some of the problem that the existing financial system has. So for example, cross border payment is one of the pain point facing both retail and then businesses. So Japan is, as you say, it’s a kind of one of the notorious countries that you know cross border. Payment takes time, and then it takes cost. So with Blockchain technologies like stable coin, we might be able to have a better consumer experiences of sending money to or from outside of Japan. So that’s one of the example. And then another example is an IP contents. So we have, Japan has a lot of IP contents, like animation game. So that kind of an IP could be kind of, you know, in a sense, could be exported to outside of Japan, on blockchain platform, so that, you know, both artists or you know, service providers can get, can get the benefit out of that services. So that’s just some of the example of our aspect. But as I mentioned, you know, we cannot foresee the future, but I like the Internet, what matters is to have good foundations for future innovation, and then it’s up to the private sectors, kind of, you know, genius guides to, you know, make something out of that.
Chengyi
Yes, we, you know, it’s, it’s hard to to forecast the future in any in any realm, but in crypto, it’s particularly challenging. I certainly wish that I had forecast where Bitcoin prices would be 10 years ago. But, you know, here we all are earning a earning a wage. I think it’s really interesting. So I think what you said goes to one of the fundamental, I guess, factors of blockchain that makes it so exciting. So it we’re not just talking about, you know, Bitcoin, about crypto assets. We are talking we’re not even just talking necessarily about about financial services. And how you know, blockchains can, you know, solve some of those pain points that have been dogging financial services for. Many decades, in a way, you know, this is this has the potential to be a new form of digital infrastructure that will enable new modes of economic activity and new ways that economies as a whole can engage globally. And for that, you know, we do need a strategy that does cut across agencies and so often, when we look across the world, we do see, you know, sometimes a bit of a siloed approach. So often each sector, each agency, will have its own strategy or its own concerns. How do you tax crypto? How do you investigate it? How do you grow it in some countries, how do you mine it? But, you know, all of those pieces can kind of join up together. I think Japan is one of the few places where, you know, you see at least an attempt at a coherent whole of government strategy. What do you think it is about Japan that enables the government to to, you know, be able to take such a an expansive, cross functional
Ryosuke
approach, I think so usually financial regulation is very, kind of complicating, and then it’s, you know, it’s a kind of very technical so that’s why, you know, draft builds was mainly prepared by FSA rather than polishant or policy makers or industry. But when it comes to the web three and the crypto industry, you know, definitely, regulators need input from an expert, and then that’s why policymakers, and then industry and we are working together to make that happen. And then I think we had a good relationship. Sometimes, you know, industry and the regulators have a tension. And of course, you know, we have attention on some of the topics. But still, you know, we, I think we can make a candid exchange of opinion, even though we have slightly different goals. So that’s why, for years, we successfully developing our regulatory framework. But having said that, we have a lot of challenges in front of in front of us. For example, income tax is one of that and as I mentioned, to enhance capital market regulation is indispensable for the sake of investor protection. And of course, you know ml safety is a huge challenge. So North Korea rated hackaza Attacking Japan and the International crypto exchange. So that’s a real threat to not only Japan and the international society. So there’s a huge opportunities as well as risks. So it’s not easy, but we keep trying to strike a balance between innovation and their risk mitigation.
Chengyi
That’s a you’ve brought up something very pertinent. You know, hacks and theft, obviously, they are a perennial, Evergreen challenge for crypto, and they’ve also been escalating. And you pointed out how, you know, there were these big incidents mount Gox coin check that really shaped the trajectory of Japanese crypto regulation. How? So you know, over the past year, we’ve seen, you know, Diem and Bitcoin by bit, hanging over. This is not just consumer protection concerns, but also, like, sort of a national security threat, because of the involvement of DPRK actors. So like, I’m wondering, how do you expect regulators and supervisors to respond? Do you expect further tightening of rules? Do you expect further clarification, more intense supervision? Do you think you know what is the likely course of regulatory and supervisory action in responding to this threat.
Ryosuke
So I think we need to tackle this challenges from both domestic and international perspectives. So domestically, we are asking crypto exchange service operators to enhance their security measures after the DMM incident. And of course, you know, bybit is another high profile hack, so we are very much looking at security and the cybersecurity aspect of cryptoset custody. So that’s one thing, and then from regulatory perspective, it’s my personal opinion, but I said we introduced a cold wallet requirement back in 2019 and it was working quite well. But a previous because previously hot wallet was a honey pot by attackers, but a recent incident like DMM and bybit. Code wallet was attacked. So just, you know, having a cold wallet is not enough. You know, crypto exchange need sorry to governance, to manage keys, and then to have a good international internet operation to securely, to secure the private keys. So it’s a kind of never ending story, because DPRK and other actors are advancing their solutions and the attack pick that could be changing in the future. So we try to enhance the go to requirement, if necessary. But more importantly, we will work with industry and regulated entities to ensure asset custody of customers asset
Chengyi
so one of the forums where I found the most thoughtful discussions of you know the issues and the vulnerabilities underpinning these high profile hacks like bybit, and you know, the appropriate responses that industry can take. Some of those most thoughtful discussions were in bgin, the blockchain Governance Initiative network, which you know is, you know, because I think you were involved in setting that up, but it’s a fantastic decentralized network of industry players that you know, come together to research and propose standards for key challenges within crypto. I understand that jfsa had, like, a key role to play in begin getting off the ground, and you maybe were involved in begin in the earlier years. Can you tell us a little bit more about that, like what the thinking was behind setting up begin, and what your experiences in corralling industry players together?
Ryosuke
Yeah, thank you for bringing this topic, so I begin blockchain Governance Initiative. Network is multi stakeholder body for all crypto stakeholders to have a discussion and then to develop policy and papers and that could benefit and sound governance development of this ecosystem. And then it was set up in 2020, when I was a researcher at Georgetown University. And then the one of the professor, named shinchiro Matsuo was a co founder of begin. And since then, begin had a number of meetings, as well as prepared some papers, including, you know, custodial security standard, and then nfts and then defi and that kind of important topics. So, you know, begin is learning a lot from internet governance history. So rather than, you know, regulators and the policymakers decide everything about this industry, you know, they are looking at how the sound governance could be developed in collaboration with all stakeholders, including the developers and the industry expert like you. So the FSA is one of the contributor to that begin, but again, begin, it’s kind of neutral, and the academic body, and the FSA is just one of the contributors, but we hope more regulated colleagues as well as industry experts could join this platform and then to, You know, have a good discussion to tackle key challenges like DPRK hacks and then, you know, travel could be interesting topics. But unfortunately, unfortunately, we had a lot of challenges in front of us. So there are so many industry body, but I begin could be one of the key part for that? I think,
Chengyi
yeah, I agree. And I think the fact that there are so many challenges ahead of us, and the fact that the industry is moving so quickly at such a fast pace, in a way, you know, you can’t just leave it to regulators to kind of figure out the best path forward, and all the you know, the best responses that industry should take. And I think there is a lot to be said for a self organized response, particularly, you know, given the ethos of the crypto sector, the decentralization that you know, we always tout and and the idea of, you know, the community coming together to build certain standards, even before things are hard coded into regulation. I think that’s like a recurring theme. Now through our discussion, I want to take a step back and talk about something a little bit maybe more light hearted or exciting, which is, you know, parties, it’s. So I wanted to talk about Japan FinTech week, which, you know, the jfsa has now run for for two years now, it’s, it’s been an amazing experience each time. You know, different events under that broad banner, what’s the you know? Can you share a little bit about what’s the objective of the FinTech week. What’s the thinking there?
Ryosuke
Thank you very much. So and Japan FinTech week, it’s something like Singapore FinTech Festival and the Hong Kong FinTech week. So it’s a kind of, you know, festival, or you know, mix of conferences and networking where FinTech experts, including digital asset expert, can join, and they had a candidate exchange of opinion, and a lot of regulated FSA regulated regulators are joining that conversation. And then we decided to launch Japan FinTech week last year, because, as I already mentioned, you know, multi stakeholder collaboration is indispensable, especially for the digital asset sectors. But you know, and the international expert, you know, we’d like to have a more good competition in Japanese market, and in order to do so, we’d like to attract a lot of international expert like genericists to our market. So, and that’s why we decided, you know, to have this kind of conference, which is a good maybe opportunity for those who are interested in Japanese market, but they who doesn’t know how to actually get into our market. So it’s a, I think it’s a unique opportunity for industry people to see how the Japanese crypto and their FinTech market, it’s like and then how friendly the regulator is. And then, you know, maybe there are potential partners in Japan, so maybe you can talk to crypto players or banks, insurance companies, whatever, to make something happen. So it will take place March every year. So March is kind of a good season in Tokyo, so you can just come and see what’s going on in Japanese market.
Chengyi
I think it’s clearly very successful at bringing the international community to Japan. It feels like for, you know, one week in Tokyo, the entire world is there. I’m told that the pinnacle of the event this year, which I unfortunately missed right at the end of the week, was an open mic night. Can we expect that to happen again next year? Can we expect you to be performing?
Ryosuke
Yeah, I’m not good at this, but definitely, you know, actually, it’s a kind of decentralized event. So a lot of organizers are organizing a lot of events during Japan FinTech week, and some of them are provided by Stephen. It’s a, you know, Singapore global entities which are operating FinTech conference all over the world, and it’s yeah, they are writing some fun night. And the local organizers are also arranging some meetups or networkings. So you know, if you like yeah, music, you can go there, one day, if you like some other event, like manga or whatever, you know, you will find something which might interest you. So just yeah, we try to up to date what’s going on next year. So please
Chengyi
stay tuned. Is there anything in particular that we should look forward to next year? How is the FinTech week going to evolve?
Ryosuke
So I think digital asset will continue to be one of our priorities. For example, stable coin. So our first stable coin was USDC, which service providers, was granted license March this year, finally. So now I SDC is available with custodial wallet in Japan, but going forward, we will see you know, both local and international stable coins issued inside Japan or outside of Japan. So we will see we will expect a good use case of stable coin. So that kind of discussion will take place during Japan authentic week and another. One aspect is AI. So what makes me visit these days is AI, but the AI and the blockchain could be complimentary each other. So and how we can achieve if we can combine an AI and the blockchain could be another interesting discussion topic. So, yeah, we will have a number of topics for international audience.
Chengyi
I look forward to it. I just want to go back to what you said earlier about stable coins. You know, Japan again, one of the first countries in the world to come up with a stable coin regulatory framework. We are now starting to see those frameworks come into force in other jurisdictions. Hong Kong just passed its stable coin law in the EU Mika has now taken effect in some of these jurisdictions. Or, shall I say, as these national frameworks get rolled out. One of the one of the recurring themes that we hear is the concern about regulatory fragmentation. You know, it in a inherently global business model, it can be challenging for issuers to meet specific regulatory requirements in every jurisdiction, and in some of those jurisdictions, you know, if you’re not licensed as an issuer, then your asset can’t be distributed to the local user base. So how has Japan threaded that needle?
Ryosuke
So as you mentioned, stablecoin and crypto transaction is global by nature. So ideally we so we should have a kind of harmonized regulatory framework in each jurisdictions, and then from VCG perspectives. So both cryptoset and stable coin service providers should be regulated in each restrictions and the ML shift key controls should be put in place. So it’s a kind of minimum standard for ml shift sake. So we expect, I mean, fathof, expect all jurisdictions to implement head of standard for both stablecoin and encrypted asset service providers. But unfortunately, the implementation is lagging for years, partly because low capacity jurisdictions won’t have much resources to make it happen. So part of it’s providing a lot of technical assistance, and then we are working together with international body like IMF and World Bank to provide support to those jurisdictions. So that is one of the coordination effort to accelerate global implementation of FATF standard. So ideally, you know, of course, travel is one of the requirements. And then if all jurisdictions introduce fathof standard at minimum level, so we will have a coherent regulatory requirement. And then fathof, of course, does not prohibit it to put additional requirement on top of the fat off standard. So, you know, each countries is facing different risks and in different policy and the regulatory objectives. So regulatory, different regulatory, you know, difference in instance, it’s kind of natural, for example. You know, security regulation, Security Act in United States and in Japan are very different, for example. So financial regulation is fundamentally different by countries. But having said that, you know, fat off and then some international standardization party like Iosco and then Basel and the FSB will work. It will are working very hard to harmonize its regulatory objectives from both MSFD and the financial stability and the investor protection perspectives. So it’s still ongoing challenges, but I think we are working on the good direction.
Chengyi
Yeah, I think the international standard set is clearly of an important role to play in forging some level of international consensus on at least the direction of travel and the key pillars that you know, regulatory regimes need to have. I think you know this, your your mention of stable coins was very timely, just because, you know we are really seeing that in the data that we look at as stable coins become more widely used, as they become more accessible, they also are. Equally become appealing to criminals and illicit actors for various kinds of illicit purposes. So that majority of illicit flows today in crypto that we see on chain, majority of those flows are actually denominated in stable coins. And I think there’s a lot of attention, a lot of thinking, not just, I’m sure, within the regulatory community, but also within within the industry. On you know, what are some of the newer tools that we can that we can apply to this problem of illicit finance in stable coins, whether and to what extent issuers should can and should be looking at, you know, how their asset is flowing in the wild, in the secondary market, and what actions they can take around that. So, I mean, I think that’s a, I’m not going to push you to have a comment on that specifically, unless you would like to. But I do think that’s a, an, you know, an area that everybody is sort of quite keenly focused on, terms of what’s the industry best practice and also what are the regulatory expectations.
Ryosuke
So, as you rightly pointed out, stablecoin is, you know, being widely adapted globally, and as a result, some Mauritius actors are using stable coin for a list purposes. So we, I mean, the fat off, is aware of that, and then we highlighted that list use of stable coin in the previous report published June last year. And then the part of anova HCG is going to launch a new project to delve into details about stablecoin ecosystem. So we the detail is not yet decided, but we are going to look at market development recently, and then some typology of HDS or stable coin. And then potentially, we’ll explore how we can potentially mitigate the risks that a stable coin could bring. And then, you know, if we say stable coins, there are many types of stable coins on different blockchains. And then we need a more kind of granular discussion and analysis on, you know, which types of stable coin has, you know, risks and how we can prevent that. So that’s one of our priorities. And then we definitely need input from private sectors. I
Chengyi
think we, we keenly. We have a keen interest in that work, of course, and here at chainalysis, we’re always happy to to participate wherever we can, contribute wherever we can. But I think that work that that the fat F is doing, is going to be very, very important. So just while we’re on this risk perspective, while we’re talking about, the fat F, you know, aside from from hacks and theft, aside from DPRK, aside from, you know, stable coins as a vector for financial crime, are there any other sort of financial crime trends that are on your mind, either with regard to Japan or to the broader crypto ecosystem?
Ryosuke
So in Japan, crypto set advantage used for scam and fraud from many aspects. Maybe it’s similar to other, many other countries, like, you know, investment scam or romance scam, and then, let’s say so, ransomware continue to be one of our serious challenges. And then crypto asset like Bitcoin or Moneo often used for the transactions, so then stable coin might be used for the similar objectives. So I’m not sure how the Japan’s market, you know, financial crime landscape, is different from other countries, but obviously this is a global issues, as highlighted by our father’s report. So we are looking at both, you know, high profile and incident like a DPRK hack, as well as scam and fraudulent use of Bitcoin, because, you know, it harms little investors and then it, you know, could disrupt ordinary people’s lives. So it’s very important for the sake of financial
Chengyi
regulation. Yeah, that’s a really good point. I think scams and fraud are the recurring are the key challenges, or the focal points across both law enforcement and regulators that we see across, you know, all the countries in APAC, it’s really wherever you look. It’s not just investment scams. And not just investment scams, also romance scams, and the shape shifting nature of it, it’s very difficult to, you know, obviously, physically disrupt the actors. The scam compounds. And so the best sort of, or at least one of the key elements of the response, does need to be to follow the money and try to to stop those illicit proceeds from reaching the hands of the criminals behind them and being reinvested in more more fraud. So I know, you know, I’ve kept you on the line for quite a while, and we’ve gone through some fairly weighty subject matter, DPRK, scams, hacks, ransomware. So before we end, I just wanted to, you know, do something little light and fun. So if you’re okay, we’re gonna do a quick fire round one word responses. Is that okay?
Ryosuke
Okay, I try. Okay. So
Chengyi
what, in your view is one word that is overused in crypto.
Ryosuke
It may be decentralization.
Chengyi
Decentralization is a good one. It is a recurring theme.
Ryosuke
Some of them are not that decentralized as the name suggests.
Chengyi
I think there are, one of my teammates always says this, there are, there are governments that are more decentralized than crypto. So, yes, that’s for sure. Okay, how about one word that encapsulates crypto regulatory priorities for the next year.
Ryosuke
I think it it’s harmonization. Maybe it’s a boring answer, but harmonization is definitely needed because, you know, within jurisdictions, as well as across jurisdictions. So that’s very important
Chengyi
harmonization. That is music to the ears of many global crypto businesses. Okay, final one, one word that describes next year’s Japan FinTech week,
Ryosuke
it’s, I’d say tangible use case. So, you know, maybe we will see the real use case examples of blockchain based financial services next year. So you will see that at the Java FinTech week.
Chengyi
That’s awesome. It’s aspirational, but that’s fantastic. I think we’re all looking forward to that. So thank you so much for your time to ask you. This has been such a rich conversation. We’re very grateful that you spent all this time with us. We’re really looking forward to the next Japan FinTech week and everything that you guys have in the pipeline. Thank you very much.
Ryosuke
Thank you very much. I really enjoyed that conversation. So thank you. Thank you and generacy for having me.