Implementation of stricter regulations for crypto exchanges in Japan
Japan is moving towards major reforms in cryptocurrency regulation sparked by renewed attention to Mt. Gox-related repayments in 2024.
The Financial Services Agency (FSA) intends to establish new regulations requiring cryptocurrency exchanges to hold specific “liability reserves” to safeguard customers in the event of lost assets such as hacks or unauthorized transfers. These measures aim to align the cryptocurrency sector with stringent standards set for traditional financial institutions in Japan, known for its rigorous regulatory environment.
By Dec. 9, 2025, according to the Payment Services Act, registered cryptocurrency exchanges in Japan must adhere to strict guidelines, including asset custody, accounting practices, separation of client funds, Anti-Money-Laundering (AML) controls, and cold storage mandates. However, exchanges currently do not have a legal obligation to maintain dedicated funds for customer compensation post-hack or unauthorized withdrawals. The FSA and its advisory Financial System Council recognize the need to close this protection gap.
Japan’s crypto sector has seen notable failures causing consumer losses. The 2014 Mt. Gox hack, which saw over 740,000 Bitcoin (BTC) stolen, led to the exchange’s bankruptcy, with repayments ongoing. In May 2024, the exchange DMM Bitcoin lost 4,502.9 BTC to a significant theft. These occurrences highlight customer vulnerability despite robust protections like mandatory cold wallet storage.
Requirements of the proposed liability reserve rules
The new regulations will mandate exchanges to maintain dedicated funds to compensate customers during security breaches.
A legal mandate for liability reserve allocation
According to a report by The Nikkei, the proposed legislation will require that all registered cryptocurrency exchanges set aside liability reserves. These reserves will facilitate customer repayments if assets are lost through unauthorized transactions. This requirement will extend to funds stored in cold wallets, disrupting the prior assumption that offline storage provided adequate protection.
Aligning reserves with Japan’s securities industry regulations
The FSA aims to determine reserve size based on standards utilized by securities firms in Japan. Traditional securities companies are required to maintain reserves between 2 billion and 40 billion Japanese yen, depending on their size, risk profile, and operational level.
Insurance as a potential alternative
To alleviate the burden on smaller operators, the FSA is exploring the possibility of allowing exchanges to satisfy some or all reserve mandates through approved insurance policies rather than solely holding cash or liquid assets. Specifics regarding acceptable policy types, minimum coverage levels, and approved insurers remain under consideration.
Liability reserve as part of a larger regulatory revamp
The liability reserve regulation is just one component of a larger set of proposed reforms. Additional changes include:
Mandating third-party wallet providers, custodians, and trading system operators to register with regulators.
Reclassifying certain cryptocurrencies under the Financial Instruments and Exchange Act, imposing stricter securities-like rules such as audits and disclosure requirements.
Enhancing insolvency processes to facilitate quicker compensation for customers, potentially from liability reserves or insurance.
Did you know? South Korea’s 2021 regulations mandated exchanges to collaborate with licensed banks, implement real-name accounts, and adhere to rigorous AML checks, reducing the number of active exchanges significantly.
Reasons behind this regulatory framework
The main aims are heightened customer protection, enhanced market confidence, and addressing remaining regulatory weaknesses:
Enhancing customer protection: Hacking events and subsequent compensation delays underscore the necessity for expedited compensation mechanisms. Liability reserves will guarantee that exchanges have funds readily accessible, avoiding lengthy bankruptcy processes for customers.
Restoring and maintaining market trust: Japan seeks to align cryptocurrency regulations more closely with those governing the securities industry, positioning the nation as a secure environment for digital assets while mitigating the reputational risk from previous high-profile hacks.
Closing regulatory loopholes: While cold wallet mandates lessen attack risks, they do not eliminate them entirely. New reserves introduce an additional layer of financial recovery focus post-incident, rather than solely prevention.
Did you know? The European Union’s Markets in Crypto-Assets (MiCA) regulation standardizes rules across 27 nations, addressing licensing, reserve requirements, market abuse, and consumer protection—creating the world’s first continent-wide regulatory framework for crypto exchanges.
Effects on exchanges and investors
The new regulations will influence exchanges, customers, and the overall market in multiple ways:
Effects on exchanges
Increased operational costs due to the necessity of maintaining substantial reserves or securing insurance
Challenges for smaller exchanges in meeting requirements, potentially leading to industry consolidation
Additional accounting, reporting, and compliance obligations.
Effects on customers
Enhanced protection against losses stemming from exchange failures
Quicker compensation in case of hacks due to the specific financial buffer
Overall decreased risks associated with utilizing centralized platforms.
Effects on the broader market
Japan’s framework may serve as a catalyst for regulatory trends in other nations, encouraging global exchanges to adopt more professional custody and risk management protocols.
Did you know? US crypto exchanges encounter a complex patchwork of state-level regulations, including the New York BitLicense and federal oversight for certain assets, complicating compliance considerably.
Points still needing clarification
Numerous critical aspects of the proposed regulations remain to be finalized, dependent on the upcoming Financial System Council report and 2026 legislation.
Unresolved matters include:
The precise formula for calculating each exchange’s required reserve amount
The degree to which insurance can substitute for cash reserves
Implementation timelines and any grace periods applicable to existing exchanges
Interactions between reserves and updated insolvency protocols
Whether the obligation extends to cases of mismanagement in addition to hacks
The specific monitoring and enforcement strategies.
