Introducing stricter rules for crypto exchanges in Japan
Japan is about to introduce significant changes to cryptocurrency regulation after drawing renewed attention to repayment activity related to Mt. Gox in 2024.
The Financial Services Agency (FSA) plans to introduce latest rules that can require cryptocurrency exchanges to keep up special “liability reserves” to guard customers if their assets are lost as a consequence of hacks or unauthorized transfers. The measures aim to bring the cryptocurrency sector closer to the strict standards that apply to traditional financial institutions in Japan, one of the crucial regulated markets on the planet.
Starting December 9, 2025, registered cryptocurrency exchanges in Japan must meet strict requirements under the Payment Services Act. These include asset custody, accounting, segregation of customer funds, anti-money laundering (AML) controls and cold storage regulations. However, there remains to be no legal requirement for exchanges to carry special funds to compensate customers after a hack or unauthorized outflow. The FSA and its advisory Financial System Council have concluded that this protection gap must be closed.
Japan has experienced major failures and consumer losses within the crypto industry previously. The Mt. Gox hack in 2014, during which over 740,000 Bitcoin (BTC) was stolen, led to the exchange's bankruptcy and a repayment process that remains to be ongoing. In May 2024, the Japanese exchange DMM Bitcoin lost 4,502.9 BTC in a significant theft. These incidents showed that customers remain vulnerable despite strict security measures comparable to mandatory cold wallet storage.
What the Proposed Liability Provision Rules Require
The latest rules require exchanges to keep up dedicated funds to compensate customers within the event of security breaches.
There is a legal obligation to create liability provisions
According to a report by The Nikkei, the draft law would require all registered cryptocurrency exchanges to keep up liability reserves. These reserves are used to repay customers if assets are lost through unauthorized transfers. The requirement even applies to funds stored in cold wallets, ending the previous assumption that offline storage alone provides sufficient protection.
Comparison of reserves with Japanese securities industry rules
The FSA plans to base the scale of those reserves on standards already in place for securities firms in Japan. Traditional securities firms are required to keep up reserves of between 2 and 40 billion Japanese yen, depending on their size, risk profile and level of activity.
Alternatively, insurance could be approved
To ease the burden on smaller operators, the FSA is considering allowing exchanges to fulfill some or all reserve requirements through approved insurance policies, relatively than simply holding money or liquid assets. Details comparable to acceptable sorts of insurance, minimum coverage amounts and approved insurers are still being discussed.
The liability reserve is an element of a broader regulatory overhaul
The liability reserve rule is only one a part of a broader package of reforms. Other proposed changes include:
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Requiring third-party wallet providers, custodians and trading system operators to register with regulators.
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Reclassifying certain cryptocurrencies under the Financial Instruments and Exchange Act would impose stricter securities regulations comparable to auditing and disclosure requirements.
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Improving insolvency procedures in order that customers receive compensation more quickly, possibly from liability reserves or insurance.
Did you realize? South Korea's 2021 regulations forced exchanges to work with licensed banks, introduce real-name accounts and meet strict AML checks. This reduced the variety of lively exchanges from a whole bunch to fewer than 20 inside just a couple of months.
Why regulators pursue this framework
The primary goals are stronger customer protection, greater market trust and the elimination of remaining regulatory vulnerabilities:
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Strengthen customer protection: Hacking incidents and resulting delays in repayment have shown the necessity for faster compensation mechanisms. Liability reserves be sure that exchanges have immediate funds, relatively than forcing customers to attend through lengthy bankruptcy proceedings.
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Restore and maintain market trust: Japan is working to align cryptocurrency rules more closely with those of the securities industry. With this policy, the country goals to position itself as a protected jurisdiction for digital assets and offset reputational risk brought on by past high-profile hacking incidents.
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Closing regulatory gaps: Cold wallet requirements reduce the danger of attacks, but don’t completely eliminate them. The latest reserves add a second layer of protection that focuses on financial recovery after an incident, not only prevention.
Did you realize? The European Union Regulation on Markets in Crypto Assets (MiCA) harmonizes rules across 27 countries and covers licensing, reserve coverage, market abuse and consumer protection. It establishes the world's first continent-wide algorithm for crypto exchanges.
Impact on stock markets and investors
The changes will impact exchanges, customers and the market as an entire in several ways:
Impact on exchange
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Higher operating costs as a consequence of the necessity to keep up significant reserves or pay insurance
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Smaller exchanges are struggling to fulfill requirements, which can result in industry consolidation
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Additional accounting, reporting and compliance procedures.
Impact on customers
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Better protection against losses brought on by stock market failures
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Faster compensation within the event of hacks as a consequence of the dedicated financial buffer
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Overall, lower risks when using centralized platforms.
Impact on the broader market
Japan's approach could influence regulatory developments in other countries. Exchanges worldwide are more likely to adopt more skilled custody and risk management practices.
Did you realize? U.S. crypto exchanges face a patchwork of presidency regulations, including New York's BitLicense, money transmitter laws and federal oversight of certain assets. This fragmentation makes compliance one of the crucial complex on the planet.
What stays unclear
Many necessary details of the proposed regulations are still being finalized. These rely upon the upcoming Financial System Council report and laws for 2026.
Unresolved issues include:
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The exact approach to calculating the reserve amount of every exchange
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To what extent insurance can replace money reserves
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Implementation deadlines and beauty periods for existing exchanges
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How reserves interact with revised bankruptcy procedures
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Whether the duty extends to cases of mismanagement, not only hacks
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The precise monitoring and enforcement modalities.
