[NEWS] Financial Services Agency decides that self-managed wallets do not qualify as cryptocurrency exchange businesses

On the 8th, the Financial Services Agency ruled that services using unhosted wallets (self-managed wallets) do not qualify as cryptocurrency exchange businesses.

This was made clear when JCBI (Japan Content Blockchain Initiative) submitted an inquiry through the Ministry of Economy, Trade and Industry's gray zone resolution system, and the Financial Services Agency responded to it.

Representative examples of so-called self-managed wallets include Metamask and Phantom.

However, while self-managed wallets without a central administrator allow users to manage their own assets, they also bear the risk of losing their private keys.

For the mass adoption of Web 3.0 using blockchain, it is essential to solve the issue of managing private keys used to transfer NFTs and cryptocurrencies.

However, private keys are complex and long strings of characters, so it is a burden for general users to manage them themselves. If a private key is lost, there is a risk that digital assets will be lost forever.

If a blockchain service provider tries to reduce the burden and risk on users by managing the private key of the user on behalf of the user, it will incur costs to develop a wallet function, and it may become subject to custody regulations under the Fund Settlement Act.

If it becomes subject to such regulations, considerable costs will be incurred, such as establishing a system to comply with the law.

Started providing a service to solve the problem

In response to the FSA's response that "self-managed wallets do not fall under the category of cryptocurrency exchange business," JCBI developed "PassWallet" as a support service for developing wallet functions that are less burdensome and highly secure for both users and businesses regarding private key management, and began providing it free of charge from the 9th.

By providing PassWallet to businesses free of charge, JCBI claims that it can solve four problems in the development of blockchain services, and will promote the social implementation of blockchain.

PassWallet implements a "private key that reduces UX" function and incorporates passkey authentication such as facial recognition. And in order to solve the "risk of being subject to custody regulations," it has received a response from the FSA and confirmed it. By covering the development costs of the wallet function, the company claims that it will be able to reduce costs by using free ASP services. Furthermore, service integration through PassWallet will create collaboration opportunities between companies that use the service.

What stands out in particular is the use of a facial recognition system instead of a private key. Being able to access a wallet through facial recognition without the hassle of entering a private key has the potential to lead to mass adoption.

Reference: Financial Services Agency, JCBI
Images: Shutterstock

Related articles

Financial Services Agency to review cryptocurrency regulations. Will interest rate reviews and ETF approvals also be discussed at an accelerated pace?

Financial Services Agency to work on a system to make it easier for businesses to handle in-game cryptoassets