The Japan Financial Services Agency published the results of FinTech Demonstration Experiment Hub Project No. 10, which tested whether financial institutions could provide Automated Market Maker (AMM) services to customers while reducing money laundering and terrorist financing (ML/FT) risks by restricting access to wallets that have completed know-your-customer (KYC). The experiment, run from June to September (Reiwa 7), involved SBI VC Trade, Sony Bank, Daiwa Securities Group Headquarters, Nomura Holdings, Bitbank, Mizuho Trust and Banking, Sumitomo Mitsui Trust and Banking, Mitsubishi UFJ Trust and Banking, and KPMG Japan. It used a “Specified AMM” design in which only KYC-verified addresses could deposit or swap tokens, and liquidity pools could be formed only with transfer-restricted tokens issued by specified financial institutions. Tested controls were confirmed to work, including blocking transfers, deposits and swaps when a KYC token is invalidated or expires, blocking AMM activity when an AMM authentication token is invalidated, and allowing issuers to invalidate their transfer-restricted tokens to halt use. On legal questions, the FSA noted that developing and deploying an AMM that cannot be modified post-deployment did not fall under Japan’s crypto-asset exchange business framework in this experiment because the tokens used were imitations rather than “crypto assets, etc.” It added that decentralised exchange protocol deployment could fall within the regime in some cases and should continue to be examined in line with the Financial Services Council’s work while monitoring overseas regulatory and supervisory developments. The paper also flagged further issues for consideration for AMM-related business, including the regulatory treatment of AMM users’ swaps and liquidity provision, the status of interface providers and post-deployment modification, the handling of electronically recorded transfer securities display rights on public blockchains, and whether banks’ AMM-related roles fit within permitted banking activities.

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