Japan's FSA requires exchanges to hold liability reserves to cover hacks and fraud

Japan is moving ahead with tougher regulations for the crypto industry, as the Financial Services Agency now requires that cryptocurrency exchanges maintain substantial safety reserves to protect users in the event of a failure or crisis.

Under the proposed amendments to the Payment Services Act, exchanges would be required to maintain a portion of customer assets domestically, thereby reducing the risk of loss or unauthorized outflows. The FSA’s working group is currently finalizing the details of these new rules, which follow revisions to the Payment Services Law passed in June 2025.

Japan’s FSA said it would bring in the new rules sooner after reports that another exchange, Japan Digital Design Inc. (JDD), had experienced problems with its internal system and signed a letter of intent with external security experts, including Japan’s Mitsui Knowledge Industry Co. The decision had also been partly motivated by recent hacking attacks on overseas exchanges, the financial regulator said.

Japan moves to strengthen crypto user protections

The move represents the nation’s cryptocurrency regulatory reform, the largest of its kind in Japan in two years. Exchanges are now required to maintain a liability reserve — a separate buffer fund to protect users. There will be no longer any impact on customers from hacks, unauthorized access, or fraudulent outflows; all losses on these fronts will be covered by an insurance fund, allowing reimbursements to be processed quickly.

The action came amid growing concerns about security in the cryptocurrency sector. Hundreds of millions of dollars were lost in a massive hack at one of Japan’s largest cryptocurrency platforms in 2024. The breach highlighted vulnerabilities not in the exchange’s own systems, but rather in third-party providers that service some of its trading architecture.

To prevent further misconduct, the FSA wants all third-party custodians and wallet providers that are accessed by exchanges to register as well. Client assets will only be held by licensed firms. This is all in an effort to have both the exchanges themselves and their partners meet rigorous technical and operational standards. 

The FSA has identified supply chain risk as one of its main concerns. Those kinds of risks create vulnerabilities throughout the network that can be exploited by attackers to compromise the network. The new rules are designed to fill those gaps. 

Regulatory authorities are also promoting the adoption of security measures based on international standards in exchanges and increasing the level of information security management. 

Regulatory measures have been established predominantly by trade associations, such as the Japan Virtual and Crypto Assets Exchange Association (JVCEA). Exchanges have also promised to put internal auditors through retraining and to strengthen their risk-control rules in line with the stricter guidelines from the FSA. Through this partnership, the parties aim to enhance market confidence and increase its accessibility.

Japan’s regulators push to integrate crypto into the financial system

Japan’s Financial Services Agency (FSA) intends to classify certain cryptocurrencies as bank-tradable financial products. A working group under the Financial Services Council, an advisory council to the Prime Minister, is completing a report that includes recommendations for a broader set of rules around crypto, including the creation of liability reserves.

A prime target is a proposed revision to the Financial Instruments and Exchange Act (FIEA). Under this proposal, specific crypto assets would be given a new legal definition as financial instruments akin to stocks or bonds. This would place them under more stringent market regulation. As part of the change, potential new rules for insider trading could extend to crypto, whereby trading on undisclosed non-public information is unlawful.

The FSA is expected to introduce a formal bill to revise the law within a year. Regulators are also explaining how they will oversee crypto lending, staking, and other ”credit‑exposure” services. These services require users to lend or stake their tokens, which can create risk if the platform collapses or mismanages funds.

Another report suggests that the FSA has been considering relaxing regulations to allow banks to play a larger role in the crypto sector. Banking conglomerates would be allowed to operate a crypto trading platform and hold digital assets on their balance sheets, provided certain risk management standards are met.

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