The landscape of cryptocurrency in Japan is undergoing significant transformation as authorities ramp up efforts to bolster investor safety in this dynamic sector.
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Japan’s Financial Services Agency (FSA) is set to implement comprehensive regulations mandating that crypto exchanges maintain specified liability reserves to protect users against hacks, fraud, or technical failures.
This initiative emerges as Japan grapples with a surge in digital asset security breaches while aiming to enhance regulatory frameworks to mirror standards in traditional financial markets.
FSA’s Initiative for Liability Reserves to Protect Users
Recent reports suggest that the FSA plans to roll out a legal framework that will require crypto exchanges to establish dedicated compensation reserves by the year 2026.
These reserves will operate similarly to those in the securities industry, where companies must allocate capital between ¥2 billion and ¥40 billion (approximately $12.7 million to $255 million) based on the company’s size and risk profile.
With over 12 million accounts in Japan’s cryptocurrency market, it has experienced numerous security breaches, including the notable DMM Bitcoin incident in 2024, where over 4,500 BTC were unlawfully extracted due to a flaw in a third-party wallet service.
The previously upheld cold-storage exemption, once seen as a safeguard, will be abolished as part of stricter custody regulation revisions.
As part of this initiative, a working group from the Financial System Council is evaluating legal definitions and preparing recommendations for mandatory reserves. Additionally, there is discussion about allowing exchanges to utilize insurance to cover part of their liabilities, which could ease the financial constraints on smaller firms.
Rebuilding Confidence After High-Profile Incidents
Japan’s escalating urgency is indicative of a lengthy history filled with crypto failures, spanning from the notorious Mt. Gox closure in 2014 to the DMM and SBI Crypto breaches in the recent years of 2024 and 2025. Experts believe the proposed reserves are crucial to restoring public confidence by ensuring prompt compensation in the face of unfortunate events, even during bankruptcy cases.
Under this new regulatory regime, exchanges will need to segregate customer funds, maintain verified reserve accounts, and undergo more thorough risk evaluations. A court-appointed administrator might manage asset returns in the event of an exchange’s failure, thus mitigating protracted legal disputes similar to those that plagued Mt. Gox clients.
Building a Safer and Sustainable Crypto Ecosystem
Japan’s reform agenda surpasses the introduction of liability reserves. The FSA is also considering new registration mandates for wallet services and custodians, particularly following security breaches linked to outsourced systems.
Moreover, regulators are working on reclassifying cryptocurrencies under the Financial Instruments and Exchange Act, facilitating the growth of regulated crypto ETFs, investment trusts, and enhanced tax benefits.
Related Reading: $20 Million Stolen in San Francisco Cryptocurrency Heist
If these proposals gain approval during the 2026 Diet session, they would position Japan among the foremost secure digital asset markets worldwide, effectively balancing investor protection with the promotion of responsible sector growth.
Cover image from ChatGPT, BTC analysis chart from Tradingview
