Stricter Regulations for Cryptocurrency Exchanges in Japan

Japan is implementing significant regulatory changes for cryptocurrency exchanges, focusing on customer protection and improving financial security in response to past hacking incidents. The proposed rules will require exchanges to maintain dedicated liability reserves to compensate customers for losses and enhance overall market trust.

Key Takeaways

The Japanese Financial Services Agency (FSA) is introducing regulations that require cryptocurrency exchanges to keep liability reserves for customer protection.
New rules aim to align crypto regulations with traditional financial standards to enhance security and minimize risks.
These changes may lead to increased operational costs for exchanges, while providing stronger protections for customers.
Important regulatory details are still being finalized, including reserve calculation methods and the role of insurance.

Introduction: Stricter Rules for Crypto Exchanges in Japan

Japan is preparing to enforce major changes in cryptocurrency regulation, particularly in light of renewed focus on repayment activities related to Mt. Gox in 2024. The Financial Services Agency (FSA) intends to introduce regulations stipulating that cryptocurrency exchanges must hold special “liability reserves” to protect customers from potential losses due to hacks or unauthorized transactions. These measures aim to bring the cryptocurrency industry in line with the stringent rules applied to traditional financial institutions in Japan, which is one of the most closely monitored markets globally.

As of December 9, 2025, registered cryptocurrency exchanges must adhere to strict requirements under the Payment Services Act. This includes asset custody, accurate accounting, the separation of client funds, Anti-Money Laundering (AML) controls, and cold storage regulations. However, currently, there is no obligation for exchanges to maintain dedicated funds to compensate customers after an incident. The FSA, along with its advisory Financial System Council, recognizes that this gap in protection must be addressed.

Japan has experienced notable failures and significant consumer losses in its crypto sector. The infamous 2014 Mt. Gox hack, in which over 740,000 Bitcoin were stolen, led to the exchange's bankruptcy and an ongoing repayment process. Moreover, in May 2024, Japanese exchange DMM Bitcoin was subjected to a hack resulting in the loss of 4,502.9 BTC. Such incidents highlight that customers remain at risk despite existing strong safeguards like mandatory cold wallet storage.

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Proposed Liability Reserve Rules

The new proposed regulations will mandate that exchanges maintain specific funds to compensate customers in case of security breaches. According to a report from The Nikkei, the draft legislation requires all registered cryptocurrency exchanges to establish liability reserves to reimburse customers for losses incurred from unauthorized transfers. This requirement will extend to funds held in cold wallets, ending the previous assumption that offline storage alone provides adequate protection.

The FSA plans to determine the size of these reserves based on standards already applied to securities firms in Japan. Traditional securities companies must hold reserves between 2 billion to 40 billion Japanese yen, depending on their size, risk profile, and activity levels.

To alleviate the burden on smaller exchanges, the FSA is considering permitting exchanges to meet some or all reserve requirements using approved insurance policies instead of solely relying on cash or liquid assets. Ongoing discussions will outline acceptable policy types, minimum coverage levels, and approved insurers.

The liability reserve rule is part of a broader reform initiative. Other proposed changes include:

Registration requirements for third-party wallet providers, custodians, and trading system operators with regulators.
Reclassification of certain cryptocurrencies under the Financial Instruments and Exchange Act, leading to stricter securities-style regulations, including audits and disclosure requirements.
Improved insolvency procedures to speed up compensation for customers, potentially utilizing liability reserves or insurance.

Why Regulators Are Pursuing This Framework

The main objectives behind this regulatory framework include enhanced customer protection, increased market confidence, and addressing remaining regulatory weaknesses.

Enhanced Customer Protection: Multiple hacking incidents and delayed reimbursements have underlined the necessity for quicker compensation mechanisms. Liability reserves will ensure that exchanges have funds accessible immediately, thus minimizing customers' waiting period during lengthy bankruptcy processes.
Restoring Market Trust: Japan aims to better align its crypto regulations with those governing the securities industry. This initiative seeks to establish Japan as a secure destination for digital assets and mitigate the damage caused by notorious hacking incidents.
Addressing Regulatory Weaknesses: While cold wallet regulations limit risk, they do not eliminate it completely. The introduction of liability reserves provides an additional layer of financial security aimed at recovery post-incident, shifting the focus from mere prevention.

Implications for Exchanges and Investors

These regulatory changes will significantly impact exchanges, customers, and the larger market in various ways.

Effects on Exchanges

Increased operating costs as exchanges will need to maintain large reserves or invest in insurance.
Challenges for smaller exchanges to comply with these requirements, potentially leading to consolidation within the industry.
Additional accounting, reporting, and compliance procedures will be necessary.

Effects on Customers

Enhanced protection against losses from exchange failures.
Quicker compensation in the event of hacks due to the availability of dedicated financial reserves.
Overall reduction of risks associated with using centralized platforms.

Implications for the Broader Market

Japan’s regulatory initiatives could influence developments in other countries, potentially leading exchanges worldwide to adopt more professional custody and risk management practices.

Ongoing Uncertainties

Many crucial aspects of the proposed regulations are still under discussion and will depend on the upcoming Financial System Council report and the legislation planned for 2026. Unresolved issues include:

The exact calculation method for each exchange’s reserve requirements.
The degree to which insurance can substitute for cash reserves.
Timelines for implementation and grace periods for existing exchanges.
Interactions between reserves and newly revised insolvency procedures.
Whether obligations will extend beyond hacks to include cases of mismanagement.
Specific monitoring and enforcement arrangements.

By addressing these critical issues, Japan aims to foster a more secure and trustworthy environment for cryptocurrency trading.