The safest country for FTX clients was Japan.

The enormous hydra FTX had branches all across the world. Among these subsidiaries, FTX Japan, seems to have fared rather well amid the breakdown of FTX and its entry into bankruptcy court. In the event that FTX Japan succeeds, the following are some lessons that other countries can take away from Japan's experiences.

In the beginning of 2022, Bahamas-based FTX bought FTX Japan, a cryptocurrency exchange with headquarters in Japan that was formerly called Liquid. While most FTX companies' clients are still waiting to hear back from them, FTX Japan claims to be almost there:

“We have put together a plan for the resumption of withdrawal service, which has been shared with and approved by the new FTX Trading management team. Development work for this plan has already started and our engineering teams are working to allow FTX Japan users to withdraw their funds.”

Due to “how these assets are held and property interests under Japanese law,” the exchange claims that Japanese customers' cash and cryptocurrencies won't be entangled in American bankruptcy procedures. Clients' cash from the largest exchange, FTX International, with offices in Chicago, the Bahamas, and Australia are still mired in insolvency.

What is it regarding Japan that might allow FTX clients who are Japanese to receive their money before everybody else？

Specifically, the regulation of cryptocurrency exchanges.

The following six components make up the FSA's framework for regulating cryptocurrency exchanges:

• Japanese cryptocurrency exchanges are required to separate their own crypto from client fiat and cryptocurrency. In other words, they are unable to deposit exchange running money into the exact same wallet or bank as those belonging to their clients.

The potential for deception is decreased by separating the funds. For instance, if customer cash kept at FTX's Japanese company were mixed in with the company's finances, it might have been simpler for executives headquartered in the Bahamas to plunder those funds.

• In addition to segregation, Japanese exchangers are required to transfer customer fiat money holdings to a trust firm or bank trust, a Japanese third-party entity, where they are administered by a trustee with consumers listed as the beneficiaries.

The ability of FTX insiders to meddle with the money of Japanese consumers would have been lessened if regulators had placed a third-party trustee in between FTX Japan and its clients.

The additional layer of security it provides in the event of bankruptcy seems to be another benefit of a trust mandate. Customers' money is kept out of a general pot where it could be recovered by an exchange's other competitive creditors by being kept with a third-party trustee.

• Customers of Japanese markets are entitled to be paid in precedence to regular creditors under a more specific bankruptcy protection provision.

Clients are an exchange's creditors. They have an IOU from the exchange. However, a cryptocurrency exchange could also owe money to bond holders, bank debtors, suppliers, or other companies that hold intercompany debts. All of these IOU holders are frantically trying to snag some of the last few scraps after an exchange fails. Consumers can be safeguarded by placing them at the very front of the list of debtors.

• Finally, an outside watchdog must confirm that all of these strict conditions have been met. Every year, every Japanese exchange is required to go through a “audit of separate management” in which a public accountant checks to see if all of the aforementioned guidelines for purchasing securities are followed. In other words, the auditor confirms that at least 95% of all cryptocurrency is stored in cold storage, that all client fiat money is held in trust, that client monies are kept separate from exchange funds, and that the exchanges are keeping an adequate quantity of performing assurance holdings.

Customers of FTX Japan have not yet received their money refunded. Therefore, it is uncertain whether they will be restored to health. But early signs point to the contrary. If so, the previous six customer protections offered by Japanese exchanges deserve recognition.

Many governments are now rushing to create their own regulations for cryptocurrency exchanges in reaction to FTX's bankruptcy. They ought to be attentively observing Japan.

As a reminder, WikiBit is ready to help you search the qualifications and reputation of projects in a bid to protect you from hidden dangers in this risky industry!

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