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Nick Chong is the head of North America for, the world’s largest regulated fiat crypto platform, and is a Certified Bitcoin Professional

Millions of dollars of crypto funds lost. Thousands of traders with no idea where to turn. Disbelief across the sector.

But this isn’t the story of Canadian exchange QuadrigaCX, whose chief executive died unexpectedly, reportedly taking to his grave the virtual keys to vaults holding cryptocurrencies worth $180-million.

Rather, this is the remarkable story of two Japanese exchanges that lost a combined US$1-billion of cryptocurrencies belonging to their customers, and how Japan’s government interceded, making the country arguably the safest in the world for cryptocurrency investors today.

It started in 2014 with the attack of the Mt. Gox exchange, at the time the largest exchange in the world, when hackers made away with 850,000 bitcoins valued at US$480-million.

In full crisis-management mode, the Japanese financial regulator made a bold decision, which came in two parts:

1. Recognize bitcoin as an accepted form of payment for goods and services, so that we can regulate it.

2. Make investing and trading of bitcoin and other cryptocurrencies as safe as possible through the implementation of laws and regulations, and the requirement that all exchanges obtain a licence to operate.

The Japanese government drew from its vast experience in regulating traditional financial markets and employing the best security practices in the industry.

But history has a way of repeating itself.

A few years later came a second major hack, this time of exchange Coincheck, with theft of US$530-million of cryptocurrency assets in January, 2018.

Not missing a beat, Japan’s regulator stepped in again, first by finding out what went wrong and then by making the rounds of all the country’s 16 exchanges and requiring them to bolster security.

Today, all exchanges in Japan must implement a wide range of safeguards, including anti-money laundering (AML) procedures, fund segregation, and measures against price manipulation and insider trading.

Coming back to the story of how the funds of more than 100,000 QuadrigaCX customers seemingly vanished into thin air, how can we make sure that history doesn’t repeat itself once again?

We need only look to Japan for the answers.

A large gap exists between Japan's approach to cryptocurrency regulations and that of other countries. Regulators in most countries are just beginning to scratch the surface by implementing AML laws and other regulations to require people to pay income tax on their crypto gains.

If we take as a precept that bitcoin is a financial instrument, then of course we need to ensure it cannot be used by criminals and that people pay their taxes.

But what about protections for investors?

Some commentators suggested that users themselves were to blame for QuadrigaCX’s loss of of crypto assets. “Don’t store your funds on exchanges” is often repeated.

Some of those same commentators also suggested that Canadian regulators could not have done anything (as they claim that cryptocurrencies do not fall under their regulatory purview) and that the industry itself should self-regulate. I disagree.

If the industry wants to encourage adoption of crypto, it needs to make access both convenient and safe at the same time.

Does the teller at the bank advise you, after cashing your cheque, to take your bills and store them in a safe place at home? The industry needs to accept that not everyone is able to (or even wants to) be responsible for safeguarding their own funds.

As a regulated exchange in Japan, we at Liquid are required to implement measures, such as multisignature wallets, so that no single employee has access to customer assets without the authorization of at least one other employee. Even our CEO is not permitted to have sole control of the wallet of a person.

A number of selected employees hold keys and a quorum is required to authorize transactions. We are also prescribed to implement sophisticated risk-management procedures and logging, which have been discussed at length by industry bodies in Japan, highlighting the sophistication of Japan's cryptocurrency industry.

Compare this to Canada, where other than AML laws in a single province, there are no regulations at all for cryptocurrencies.

Even if the industry were to self-regulate, the lack of transparency would be an issue. No one knew that QuadrigaCX's CEO was the only individual with the private keys. Likewise, in a self-regulating association, exchanges would be hesitant to share information with competitors.

There is a conflict between using information to verify that each member is implementing best practices and using information to know what your competitor is up to.

This is why I believe that regulators in Canada and elsewhere need to step in, just like Japan did, to recognize cryptocurrency as the financial instrument that it is and to ensure a base level of investor protections.

Do this, or risk having history repeat itself.

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