Japan to Mandate Liability Reserves for Cryptocurrency Exchanges

FSA Proposes New Safeguards for Digital Assets

Japan's Financial Services Agency (FSA) is preparing to introduce new regulations that will mandate cryptocurrency exchanges to establish liability reserves. This initiative is designed to safeguard customer assets in the event of security breaches, operational failures, or exchange bankruptcies. The proposed legislation is slated for submission to parliament in 2026.

Currently, Japanese crypto exchanges are required to store customer digital assets in offline 'cold wallets' to mitigate theft risks. However, existing laws do not obligate these firms to hold reserve funds to compensate for losses that might occur despite these security measures. The FSA's new rules aim to close this gap, eliminating the current exemption.

Modeling on Traditional Financial Standards

The framework for these new liability reserves will be modeled after the regulations governing traditional securities firms. These firms typically maintain reserve balances ranging from ¥2 billion to ¥40 billion (approximately $12.7 million to $255 million), with the specific amount depending on their trading volumes. To ease the financial burden on exchanges, the FSA is considering allowing them to fulfill a portion of this requirement through insurance policies.

The Financial System Council, an advisory body to the FSA, is actively involved in shaping these regulatory recommendations and is expected to issue a comprehensive report on its findings.

Response to Recent Security Incidents

This regulatory push comes in the wake of several high-profile security incidents and breaches within the cryptocurrency sector. Notable events include the DMM Bitcoin hack in 2024, which resulted in losses of approximately $305 million, and a significant breach at Bybit in February 2025, where losses totaled $1.46 billion. Historically, the Mt. Gox collapse in 2014 also highlighted the need for robust customer protection mechanisms. The FSA's objective is to ensure that user losses are fully compensated, thereby enhancing consumer confidence and strengthening the stability of Japan's crypto market.

Broader Regulatory Overhaul Underway

The mandate for liability reserves is part of a broader regulatory overhaul by the FSA, which includes several other significant changes:

• Reclassification of Cryptocurrencies: The FSA plans to reclassify 105 cryptocurrencies, including Bitcoin, as financial products under the Financial Instruments and Exchange Act (FIEA). This will subject them to stricter disclosure, reporting, and market-surveillance rules akin to traditional securities.
• Custodial Oversight: A registration system for third-party custodians and technology providers is also under consideration to enhance oversight of the wider crypto ecosystem.
• Tax Reform: The agency is exploring a potential tax overhaul to introduce a flat 20% tax rate on crypto profits, aligning it with the taxation of equities.
• Asset Recovery Procedures: New procedures will be established to facilitate the return of customer assets in the event of an exchange's collapse, empowering administrators to intervene more effectively.
• Asset Segregation: Exchanges will be required to segregate user assets from their own company assets to streamline asset recovery processes during bankruptcies.

These comprehensive measures underscore Japan's commitment to fortifying its digital asset market and fostering institutional participation while prioritizing investor protection.