Japan's Financial Services Agency (FSA) is poised to implement a significant tightening of its digital-asset regulatory framework, with plans to introduce stringent requirements for crypto exchanges. Central to these reforms is a proposal mandating exchanges to establish liability reserves, designed to compensate customers in the event of security breaches, operational failures, or bankruptcies. This initiative marks a crucial evolution in Japan's approach to digital-asset custody, moving beyond the current mandate for cold-wallet storage, which, while reducing theft risks by keeping assets offline, offers no explicit obligation for firms to hold reserve funds against losses that occur despite these safeguards.

The urgency for these new regulations stems from a recognized gap in existing law, deemed unacceptable by regulators following a series of high-profile breaches. The FSA aims to submit the necessary legislation to parliament in 2026. If enacted, crypto exchanges would be compelled to build reserve balances akin to those maintained by traditional securities firms, which typically range from ¥2 billion to ¥40 billion, depending on their trading volumes. These established benchmarks, coupled with the history of significant crypto-asset leaks, will serve as a guide for the FSA in determining appropriate thresholds for digital-asset platforms. To alleviate the financial burden on exchanges, the agency is exploring the possibility of allowing them to fulfill a portion of this requirement through insurance, an approach that mirrors policies already adopted by the European Union and Hong Kong, both of which have introduced capital and insurance mandates for crypto platforms in response to their own surge in security incidents.

Japan's move toward a more robust regulatory environment is profoundly shaped by its own challenging history with crypto hacks. Notable incidents include the May 2024 breach of DMM Bitcoin, which resulted in a loss of ¥48.2 billion in bitcoin, marking one of the largest exchange breaches in the country since the infamous Mt. Gox incident. Furthermore, the global hack in February 2025, which saw Bybit lose approximately $1.46 billion, further intensified scrutiny. These events have reignited critical questions regarding the sole reliance on cold-wallet rules, especially given the growing trend of exchanges outsourcing technology and operational functions to external vendors.

The reforms extend beyond just reserve requirements. The FSA is also seeking to establish a comprehensive legal framework that guarantees the swift return of customer assets should an exchange face collapse or lose managerial control. This involves implementing stricter asset segregation protocols and granting clearer authority to court-appointed administrators to return funds directly to users. Concurrently, regulators are considering a broader reclassification of crypto assets under the Financial Instruments and Exchange Act. This reclassification acknowledges the evolution of crypto from mere payment tools into speculative investment products. Such a shift would trigger a host of new regulations, including insider-trading bans, enhanced disclosure rules, and more rigorous custody audits, effectively aligning crypto markets with the stringent standards applied to traditional securities firms. Earlier this year, the FSA had already finalized a plan to reclassify 105 cryptocurrencies, including Bitcoin, as financial products, thus imposing the same disclosure, reporting, and market-surveillance rules governing traditional securities. This would necessitate exchanges publishing detailed data on each token's issuer, blockchain design, and volatility, while new insider-trading regulations would explicitly prohibit issuers and exchange executives from trading on non-public information.

In parallel, Japan is advancing on several related fronts. The FSA is contemplating a registration system for third-party custodians and technology providers, aiming to enhance oversight of the broader ecosystem supporting crypto exchanges. Simultaneously, domestic financial institutions are increasing their engagement in the crypto space, exemplified by JPYC's launch of what it describes as the world's first fully redeemable yen-pegged stablecoin, and major asset managers preparing for the introduction of the country's first crypto-based investment trusts.

Adding to these comprehensive regulatory shifts, the FSA is also championing a significant tax overhaul for cryptocurrencies. Under current regulations, crypto profits are taxed as "miscellaneous income" at rates that can reach up to 55%. The agency is advocating for a flat 20% tax rate, consistent with the taxation of equities. This proposed change, which could be implemented as early as 2026, would apply to both individual and institutional investors. These sweeping moves underscore Japan's concerted effort to accelerate its Web3 push, including a reevaluation of rules that currently restrict banks from holding or offering crypto assets, all while fortifying its digital-asset market and fostering increased institutional participation.