Japan’s Landmark Crypto Reforms: Fortifying Investor Protection and Paving the Way for Digital Asset Growth

Japan is poised to significantly strengthen its cryptocurrency regulatory framework, aiming to bolster investor protection and solidify the legal standing of digital assets. In a pivotal move reported by Nikkei Asia, the Financial Services Agency (FSA) is drafting new legislation that would mandate domestic crypto exchanges to establish “liability reserves.” These reserves would serve as a crucial financial safeguard, compensating for operational losses in the event of platform hacks or asset breaches.

Mandatory Liability Reserves: A New Shield for Investors

While Japan’s existing crypto regulations are already among the world’s most stringent, requiring exchanges to store user assets in “cold wallets” to mitigate hacking risks, a critical gap has remained: the absence of a compulsory compensation fund. The FSA’s proposed amendments directly address this oversight, making liability reserves a statutory obligation for exchanges. This landmark bill is anticipated to be submitted to the National Diet for deliberation next year.

The impetus for this regulatory upgrade stems from a painful lesson learned in 2024, when prominent Japanese exchange DMM Bitcoin suffered a staggering $312 million hack. Investigations revealed that the breach originated from Ginco, a Tokyo-based software company outsourced by DMM to manage its transactions. This incident underscored the urgent need to mitigate third-party risks.

Enhancing Third-Party Oversight

In response to such vulnerabilities, the FSA earlier this month also signaled its intent to introduce new rules requiring third-party custodians and trading partners, who provide services to exchanges, to register with the authorities before commencing operations. This additional layer of oversight is expected to be proposed during the ordinary Diet session in 2026, further fortifying the ecosystem against external threats.

Reclassifying Crypto: From Payment Method to Financial Product

Beyond direct investor protection, the Japanese government is embarking on a comprehensive reform to clarify the legal status of digital assets. The FSA is actively evaluating a significant shift: reclassifying the regulatory foundation for cryptocurrencies from the existing Payment Services Act to the Financial Instruments and Exchange Act, aligning them with traditional securities.

This reclassification carries profound implications. It signifies Japan’s formal recognition of cryptocurrencies as regulated “financial products,” a move that paves the way for eagerly awaited tax reforms. Under the proposed changes, investment gains from crypto assets could potentially be subject to a flat 20% tax rate, mirroring stocks and bonds, a dramatic reduction from the current highest marginal rate of 55% under miscellaneous income tax. This is widely regarded as a significant boon for Japan’s crypto industry and investors.

Embracing Stablecoins and Traditional Finance Integration

Japan’s regulatory foresight extends to stablecoins, where authorities have demonstrated an open and supportive stance. They back a joint initiative involving three major banks to develop a Yen-pegged stablecoin, explicitly integrating a fiat-backed stablecoin ecosystem into the nation’s long-term financial strategy.

As these policy benefits become clearer, traditional Japanese financial powerhouses are aggressively positioning themselves in the digital asset space. According to a recent report by Nikkei, six leading wealth management firms, including Mitsubishi UFJ Asset Management and Daiwa Asset Management, are actively developing Japan’s first “cryptocurrency investment trust funds” (akin to mutual funds). This initiative aims to channel substantial private Japanese capital into the digital asset market within a compliant and regulated framework.