Introduction of stricter rules for crypto exchanges in Japan
Japan is preparing to implement major changes to its cryptocurrency regulations due to renewed focus on Mt. Gox-related repayment issues in 2024.
The Financial Services Agency (FSA) intends to introduce new regulations requiring cryptocurrency exchanges to maintain specific “liability reserves” to safeguard customers in case of asset loss due to hacks or unauthorized transactions. These measures are designed to align the cryptocurrency sector with the stringent standards of Japan’s traditional financial institutions, which are among the most closely monitored globally.
By December 9, 2025, under the Payment Services Act, registered cryptocurrency exchanges in Japan will be mandated to adhere to rigorous guidelines. This includes asset custody, accounting, client fund segregation, Anti-Money-Laundering (AML) protocols, and cold storage regulations. Yet, as of now, exchanges are not legally required to maintain dedicated funds for customer reimbursement following a hack or unauthorized withdrawal. The FSA and the Financial System Council have concluded that this protective shortfall needs addressing.
Japan has experienced significant failures and consumer losses in the cryptocurrency arena. The 2014 Mt. Gox hack, where over 740,000 Bitcoin (BTC) were stolen, led to the company’s bankruptcy and an ongoing repayment process. In May 2024, DMM Bitcoin, a Japanese exchange, lost 4,502.9 BTC in a significant theft. Such incidents highlight that customers remain at risk despite stringent measures like mandatory cold wallet storage.
What the proposed liability reserve rules require
The proposed regulations will mandate exchanges to set aside dedicated funds for customer compensation in case of security breaches.
A statutory obligation to set aside liability reserves
As per a Nikkei report, the draft legislation will require all registered cryptocurrency exchanges to keep liability reserves, designated to repay customers for assets lost through unauthorized transfers. This requirement will encompass funds stored in cold wallets as well, displacing the previous assumption that offline storage sufficed for protection.
Benchmarking reserves to Japan’s securities industry rules
The FSA intends to determine the size of these reserves based on standards currently applicable to securities firms in Japan. Traditional securities companies must maintain reserves ranging from 2 billion to 40 billion Japanese yen, based on their size, risk profile, and activity level.
Insurance may be allowed as an alternative
To alleviate the burden on smaller firms, the FSA is contemplating allowing exchanges to satisfy part or all of the reserve requirements through approved insurance policies instead of solely holding cash or liquid assets. Details regarding permissible policy types, minimum coverage levels, and approved insurers are still being debated.
Liability reserve is part of a wider regulatory overhaul
The liability reserve requirement is merely one facet of a broader set of reforms. Other proposed changes encompass:
Mandating third-party wallet providers, custodians, and trading system operators to register with regulators.
Reclassifying certain cryptocurrencies under the Financial Instruments and Exchange Act which would enforce stricter, securities-style regulations, including audits and disclosure mandates.
Enhancing insolvency procedures to ensure quicker customer reimbursement, potentially through liability reserves or insurance.
Did you know? South Korea’s 2021 regulations compelled exchanges to collaborate with licensed banks, create real-name accounts, and implement strict AML checks. This drastically reduced the number of active exchanges from hundreds to under 20 in just a few months.
Why regulators are pursuing this framework
The main objectives are enhanced customer protection, increased market confidence, and the eradication of existing regulatory weaknesses:
Boosting customer protection: Hacking events and subsequent delays in reimbursement reveal the necessity for expedited compensation systems. Liability reserves will secure immediate access to funds for exchanges, alleviating the burden on customers to endure lengthy bankruptcy processes.
Restoring and maintaining market trust: Japan aims to synchronize cryptocurrency regulations with those of the securities sector. This initiative positions the nation as a secure environment for digital assets, mitigating the reputational risk stemming from previous high-profile hacking cases.
Closing regulatory gaps: While cold wallet requirements mitigate risk, they do not eliminate it entirely. The introduction of reserves adds a secondary layer of financial recovery focus after an unfortunate event instead of merely preventing occurrences.
Did you know? The European Union’s Markets in Crypto-Assets (MiCA) regulation standardizes regulations across 27 countries, addressing licensing, reserve backing, market abuse, and consumer protection. It establishes the first continent-wide rulebook for cryptocurrency exchanges.
Implications for exchanges and investors
The upcoming changes will influence exchanges, customers, and the overall market in multiple ways:
Impact on exchanges
Increased operational expenses due to the necessity of maintaining significant reserves or acquiring insurance
Challenges for smaller exchanges in meeting the requirements, potentially leading to consolidation in the industry
Extra accounting, reporting, and compliance obligations.
Impact on customers
Enhanced security against losses stemming from exchange failures
Quicker reimbursements following hacks, thanks to the financial reserves
Overall reduction in risks associated with centralized platforms.
Impact on the broader market
Japan’s approach may set a precedent for regulatory advancements in other nations. This could prompt exchanges worldwide to adopt more sophisticated custody and risk management practices.
Did you know? US crypto exchanges navigate a complex landscape of state-level regulations, including the New York BitLicense, state money transmitter laws, and federal oversight for specific assets. This regulatory maze makes compliance one of the most challenging in the world.
What remains unclear
Many critical aspects of the proposed regulations are still under development. These will be contingent on the upcoming Financial System Council report and legislation in 2026.
The unresolved matters include:
The precise methodology for determining each exchange’s reserve requirements
The extent to which insurance may substitute for cash reserves
Implementation schedules and grace periods for current exchanges
How reserves will integrate with updated insolvency protocols
Whether the requirements will also cover instances of mismanagement, not just hacking cases
The exact monitoring and enforcement methods.
