Japan Approves Regulatory Shift to New Framework Despite Industry Concerns

Japan’s Financial Services Agency finalized a significant regulatory overhaul, moving crypto assets from the Payment Services Act to the Financial Instruments and Exchange Act (FIEA).

This change impacts over 13 million domestic crypto accounts, which collectively hold more than 5 trillion yen in deposits. This shift aims to strengthen investor protection amid rising fraud cases. However, industry leaders caution that increased compliance costs could threaten the business viability of Japan’s expanding digital asset sector.

FSA Finalizes Shift to Securities Regulation

The FSA’s expert Working Group on the Crypto Asset System held its final meeting on Wednesday and drafted a report in which crypto assets are treated under the Financial Instruments and Exchange Act. This move recognizes crypto as an investment product and seeks oversight similar to that of traditional securities.

Proposed changes include transitioning crypto regulation from the Payment Services Act to the FIEA, which CryptoQuant analyst XWIN Research Japan dubs as the core of the reform:

“This shift enables stronger investor-protection tools: standardized disclosures, unfair-trading rules, issuer-risk explanations, technical and security transparency, and stricter oversight of business conduct. The FSA also plans to intensify actions against unregistered overseas services, explore a new regulatory category for DEXs, and require exchanges to accumulate reserve funds to cover potential hacking losses.”

The proposal also mentioned mandatory contingency reserves for exchanges. These liability reserves aim to protect users from hacks or unauthorized asset outflows. The requirements include fair trading practices, reflecting responses to international crypto theft incidents that undermined investor trust.

Enhanced Disclosure and Enforcement for Market Integrity

The overhaul introduces new disclosure rules for token issuers, especially those managing centrally controlled tokens. Issuers must now provide information about token supply limits, issuance schedules, governance structure, project plans, and technical risk assessments. These steps target information gaps that frequently fuel fraudulent projects and investor losses.

The FSA also aims to combat illicit persuasion tactics by unregistered operators targeting retail investors outside regulated exchanges. The agency plans to expand its enforcement tools, including cease-and-desist orders, harsher penalties, and greater investigative powers, to address unauthorized crypto activity.

Oversight of crypto assets will be consolidated under FIEA, removing most provisions from the Payment Services Act. This unification treats crypto assets with similar rigor as stocks and bonds. Legislation for this change is expected to reach the regular Diet session in 2026.

Industry Raises Concerns Over Compliance and Viability

Despite the working group’s approval, significant unresolved concerns remain about the impact on service providers. Industry leaders from local and global blockchain associations worry that higher compliance costs could jeopardize business sustainability.

The president of the Japanese Blockchain Association even issued a stark warning about the sector’s future, stating that the industry may not survive the proposed measures. In response, some groups have suggested self-regulatory improvements, such as appointing independent transaction examiners and adopting practices similar to those used by JPX-R, to maintain investor trust without overregulation.

Experts also expressed concern that FIEA oversight could mislead investors, implying official guarantees or safety standards for crypto assets, despite their volatility and associated technical risks. Technical and legal gaps, like issues with asset inheritance when private keys are lost, remain unresolved.

As Japan holds one of the largest pools of household financial assets in the world, the new regulatory structure may enable broader participation through ETFs, regulated funds, and institutional products, which is why the rest of the cryptosphere is hopeful that Japan become a meaningful new source of demand, far larger than its small on-chain activity suggests.