Japan to require crypto exchanges to hold liability reserves

Japan is reportedly preparing a sweeping overhaul of its cryptocurrency regulatory framework, with the Financial Services Agency (FSA) advancing plans that would require exchanges to hold substantial liability reserves to protect users from hacks, insolvencies, and technical failures. According to Crypto News Australia, the proposed legislation, expected to be submitted to parliament in 2026, would mark one of the most significant regulatory shifts since Japan first introduced its crypto exchange licencing system after the Mt. Gox collapse.

FSA to end cold-wallet exemption for exchanges

Under current rules, Japanese exchanges can avoid reserve obligations by storing customer funds in offline cold wallets. The FSA now intends to remove this exemption, forcing platforms to maintain financial reserves—mirroring the requirements imposed on traditional securities firms, which must hold between US$12.7 million and US$255 million depending on trading activity.

To ease operational burdens, the framework may allow exchanges to purchase insurance instead of maintaining full cash reserves. The legislation would also establish clear procedures for returning customer assets during insolvency, granting administrators stronger intervention powers.

Security breaches drive stricter oversight

The change follows a number of widely reported cyberattacks that revealed weaknesses in the industry. North Korean hackers stole 4,502 BTC (about US$305 million) from DMM Bitcoin in 2024. Bybit lost US$1.46 billion in one of the biggest breaches in cryptocurrency history in February 2025. Systemic dangers were also highlighted by smaller occurrences, such as the US$21 million theft from SBI Crypto in 2025.

The FSA says liability reserves are designed to ensure user losses are fully compensated—akin to traditional bank protection models.

Japan moves toward broader crypto regulation

The liability reserve proposal is part of a wider regulatory overhaul the FSA is drafting. Last week, the Asahi Shimbun reported that the agency is preparing to classify cryptocurrencies as “financial products” under the Financial Instruments and Exchange Act—a move that would significantly increase compliance obligations for exchanges, institutions, and traders.

Understanding the FSA proposal

If accepted, digital assets would be handled similarly to securities, with more precise regulations governing disclosures, trading behaviour, and investor protection.

The FSA intends to mandate that exchanges release comprehensive information about each of the 105 authorised tokens, such as the blockchain’s technical details, volatility and risk metrics, and whether the token has a known issuer.

The goal is to boost transparency and help traders make informed decisions with standardised information across all listed assets.

Insider trading rules to apply for the first time

The FSA also intends to apply insider trading laws to crypto markets, an unprecedented step in Japan. The rules would prohibit trading based on non-public information such as upcoming token listings or delistings, issuer financial distress, and major network upgrades or vulnerabilities

The aim is to reduce market manipulation and price swings caused by information asymmetry.

Flat 20% tax on crypto gains under consideration

Another key proposal that was proposed a few days ago involves changing how crypto profits are taxed. The FSA is exploring a flat 20 percent tax rate, aligning crypto taxation with stocks.

Currently, gains are treated as miscellaneous income, with rates climbing to as high as 55 percent for top earners. The new structure would simplify filings and reduce tax burdens, particularly for active traders.

Banks may enter crypto custody and trading

Japan is also reviewing rules that currently prohibit banks from holding digital assets. If restrictions are lifted, banks could offer:

• Custody services
• Crypto trading desks
• Retail access to assets such as Bitcoin

This would accelerate institutional adoption and expand consumer access.

Major banks, including MUFG, Sumitomo Mitsui, and Mizuho, are already running stablecoin pilots to test operational and legal feasibility.

JPX targets corporate crypto risks

Meanwhile, the Japan Exchange Group (JPX) is preparing stricter listing rules for companies involved in crypto-related activities. The measures focus on preventing backdoor listings, regulating major corporate transformations tied to crypto and limiting fundraising heavily dependent on digital asset purchases At least three listed companies have paused digital asset acquisition plans following regulator warnings.

Japan’s approach prioritises strengthening oversight of the 105 tokens already approved, rather than expanding into thousands of global alternatives—aiming to create a more reliable and structured market.

Japan leads Asia’s regulatory transformation

Japan remains one of Asia’s most influential regulators in digital asset governance. Following the Mt. Gox collapse in 2014 and Coincheck’s 2018 hack, the country established stringent licensing and custody rules that set regional standards.

Other Asian markets are now tightening their frameworks:

– South Korea implemented the Virtual Asset Users Protection Act.

– Singapore strengthened conduct requirements under amendments to the Payment Services Act.

– Hong Kong introduced a licencing system allowing regulated retail crypto trading.