Japan Introduces New Reserve Regulations for Crypto Exchanges to Enhance Security Against Hacks

Japan is set to implement new regulations that will require cryptocurrencies exchanges to maintain dedicated reserves to protect customers from potential losses due to hacks or operational failures. This move is aimed at bolstering investor security in one of the world's most tightly regulated digital asset markets.

Key Takeaways

Japan is set to mandate crypto exchanges to hold dedicated reserves to protect customers against losses from hacks or operational issues.
The new regulations will align cryptocurrency reserves with existing practices in the traditional securities industry.
Japan's proposed framework seeks to enhance investor protections in response to recent high-profile hacks.
The evolving regulatory landscape aims to treat more cryptocurrencies as financial products and may reduce taxes to encourage participation in the regulated market.

Japan

The Financial Services Agency (FSA) plans to propose legislative changes that would mandate exchanges to establish liability reserves, ensuring they can compensate users if their platforms experience incidents leading to lost funds, as reported by Nikkei on Tuesday.

The FSA intends to present this bill to parliament in 2026, applying a framework already in use within traditional securities markets to the cryptocurrency space. Currently, Japanese law requires exchanges to store customer funds primarily in cold wallets, which are offline and generally regarded as more secure.

However, under the existing regulations, exchanges that comply with these custody requirements are not obligated to set aside specific reserves to cover potential losses, which leaves customers at risk if a data breach or system failure occurs.

Adopting Established Securities Industry Reserve Practices

The newly proposed system would take cues from reserve requirements that already exist for securities firms, which are obligated to set aside funds to address losses related to illegal or improper practices, such as incorrectly placed orders.

Japanese brokers currently hold reserves ranging from approximately 2 billion to 40 billion yen (around $12.7 million to $255 million), with reserve amounts influenced by trading volumes and associated risk factors.

Regulators aim to use these benchmarks, along with historical cases of cryptocurrency breaches, to establish suitable reserve levels for digital asset exchanges. To alleviate pressure on the exchanges' finances, the FSA is also contemplating allowing them to partially fulfill their obligations through insurance, combining capital reserves with risk transfer to third parties.

The authorities’ objective is to enhance protections against both hacking incidents and insolvency. The proposed framework would strengthen existing rules requiring the segregation of customer assets from the exchange's own funds, facilitating the return of assets to users by an independent administrator, such as a court-appointed representative, in cases of management failure or bankruptcy.

Recent High-Profile Hacks Prompt Japan to Strengthen Exchange Safeguards

This initiative follows a series of significant hacking incidents. For example, in May 2024, DMM Bitcoin reported a theft of about 48.2 billion yen worth of Bitcoin. In February 2025, the global exchange Bybit revealed that hackers had stolen roughly $1.46 billion in cryptocurrencies.

These events have raised alarms in Tokyo, highlighting that even with secure cold storage systems, large exchanges continue to be lucrative targets for cybercriminals.

Other regions are adopting similar protective measures. The European Union, for instance, mandates crypto service providers to hold capital and utilize insurance to safeguard customer assets under its MiCA (Markets in Crypto-Assets) legislation. Meanwhile, Hong Kong requires licensed exchanges to have loss compensation funds secured through insurance policies and deposits. Japan's proposal to formalize liability reserves would align its protective measures more closely with these established models.

Evolving Regulatory Landscape for Crypto Traders

As the market matures, domestic regulations have been adapting to policymakers' evolving perception of digital assets. Initially, Japan regarded cryptocurrencies mainly as payment methods and governed them under the Payment Services Act. However, the increasing use of cryptocurrencies as investment vehicles has prompted discussions about regulating certain aspects under the Financial Instruments and Exchange Act, encompassing securities and derivatives, which includes provisions against insider trading.

According to reports from the Asahi newspaper, Japan is working on a comprehensive overhaul of its cryptocurrency regulations, which would categorize additional tokens as financial products subject to insider trading laws and potentially reduce profit taxes to incentivize participation within the regulated framework.

Additionally, the Japan Exchange Group, which operates the Tokyo Stock Exchange, is considering tighter regulations concerning backdoor listing practices and potential new auditing requirements for listed companies venturing into substantial digital asset holdings, due to investor protection concerns following severe losses in recent hoarding trends.

For cryptocurrency exchanges, the upcoming reserve requirement indicates that Japan aims to maintain an open market while establishing safety measures that increasingly resemble those in traditional finance. For traders, this could mean enhanced protection in case of misfortunes, although it may result in higher compliance costs, potentially affecting the viability of some platforms to operate on a larger scale.