Japan Introduces Stricter Crypto Regulations to Address Security Failures and Fraud Cases

Japan Moves Crypto Assets Under Securities Oversight Amid Rising Investor Concerns

Crypto exchanges in Japan will soon face a stricter regulatory environment as the Financial Services Agency (FSA) finalises plans to shift crypto assets from the Payment Services Act to the Financial Instruments and Exchange Act (FIEA).

The change reclassifies cryptocurrencies as investment products, introducing oversight comparable to traditional securities.

The move affects more than 13 million domestic crypto accounts holding over 5 trillion yen in deposits.

How Will Investor Protection Be Strengthened

The FSA’s expert Working Group on the Crypto Asset System highlighted that the reform will introduce stronger safeguards for investors.

CryptoQuant analyst XWIN Research Japan noted,

“This shift enables stronger investor-protection tools: standardized disclosures, unfair-trading rules, issuer-risk explanations, technical and security transparency, and stricter oversight of business conduct.”

Exchanges will be required to establish contingency reserves to cover potential losses from hacks or unauthorised outflows.

This measure reflects lessons from high-profile incidents such as the Bitcoin DMM hack in 2024, where over 4,500 BTC were lost and the exchange had to raise emergency funds through loans and asset sales to compensate users.

Liability reserves aim to accelerate reimbursements and reduce the operational strain on exchanges during crises.

Exchanges may also purchase insurance policies to offset the financial burden of maintaining these reserves.

What Changes Will Token Issuers Face

Issuers of centrally controlled tokens will face stricter disclosure requirements.

They must provide detailed information on token supply limits, issuance schedules, governance structures, project plans, and technical risk assessments.

The FSA intends to combat illicit marketing by unregistered operators and expand enforcement powers, including cease-and-desist orders and penalties, to address unauthorised crypto activity.

Will Compliance Costs Threaten the Industry

Industry leaders have expressed concern that the increased regulatory burden could strain business operations.

The president of the Japanese Blockchain Association warned that the industry might struggle under the new measures.

Some groups have suggested self-regulatory improvements, such as appointing independent transaction examiners and adopting practices similar to JPX-R, to maintain investor trust without excessive regulation.

Experts also caution that FIEA oversight may mislead investors into perceiving crypto assets as guaranteed or risk-free, despite inherent volatility and unresolved technical issues, including asset inheritance when private keys are lost.

How Japan Plans to Protect User Assets

The FSA requires exchanges to segregate user assets from company assets, easing the process of returning funds in the event of bankruptcy.

Court-appointed administrators or legal representatives will oversee asset distribution if management loses control.

This approach aligns with practices already used by securities firms but is adapted to the local context, aiming for stronger and more consistent protection for investors.

Could This Unlock New Investment Opportunities

By bringing crypto under the FIEA, Japan is laying the groundwork for regulated investment products such as ETFs and investment trusts.

This framework may also support tax reforms treating digital assets similarly to stocks.

Despite limited on-chain activity domestically, Japan holds one of the largest pools of household financial assets in the world, and the reforms could stimulate institutional and retail participation in digital assets on a larger scale.

Will Japan’s Crypto Industry Remain Competitive

While the regulatory overhaul seeks to improve market integrity and investor confidence, compliance costs and operational adjustments pose a risk to smaller operators.

The FSA is attempting to balance protection with industry growth, but the sector’s long-term sustainability remains a key concern among local and international blockchain associations.

This move signals Japan’s intent to align crypto regulation with traditional financial markets while addressing past security failures, setting the stage for a more regulated and resilient digital asset ecosystem.