Japan's Crypto Overhaul Aims to Restore Investor Trust After Major Hacks

Japan's Financial Services Agency (FSA) is set to introduce a landmark requirement compelling cryptocurrency exchanges to maintain liability reserves to protect investors from losses stemming from hacks and operational failures. The mandate, modeled after safeguards for traditional securities firms, aims to address a string of high-profile security breaches that have eroded consumer confidence in the volatile crypto market. A bill formalizing the rule is expected to be submitted to parliament during the 2026 session according to financial reports.

The FSA's proposal comes in response to repeated incidents, including the 2024 hack of DMM Bitcoin, where attackers exploited a vulnerability in a third-party software provider to siphon approximately $312 million in Bitcoin. Despite existing requirements for exchanges to store customer assets in offline cold wallets, these measures have proven insufficient to prevent catastrophic losses. In the aftermath of the DMM breach, the exchange resorted to emergency loans and asset sales to reimburse victims, leaving users in limbo for months.

Under the new framework, crypto exchanges will be required to set aside reserves proportional to their trading volumes and historical security incidents. Traditional securities firms in Japan currently hold reserves ranging from ¥2 billion to ¥40 billion ($12.7 million to $255 million), and similar benchmarks are expected for crypto platforms. To ease financial burdens, the FSA will permit exchanges to offset reserve obligations through insurance policies, a move analysts say could help smaller players remain competitive.

The regulatory overhaul also includes measures to streamline asset recovery in bankruptcy scenarios. Exchanges will be mandated to segregate user funds from corporate assets, and court-appointed administrators will be authorized to distribute assets to customers if an exchange collapses. This aligns Japan with global peers like the European Union, which enforces capital and insurance requirements under its Markets in Crypto-Assets (MiCA) framework.

Beyond liability reserves, the FSA is recalibrating Japan's broader crypto regulatory approach. The agency is considering reclassifying cryptocurrencies under the Financial Instruments and Exchange Act-rather than the Payment Services Act-to position them as securities, a shift that would enable the creation of crypto-based investment products and align tax treatment with traditional assets. Parallel efforts include advancing a yen-stablecoin initiative backed by major banks and cracking down on insider trading in digital assets.

Industry experts have welcomed the move as a step toward stabilizing a sector still reeling from the 2014 collapse of Mt. Gox. Musheer Ahmed, founder of Finstep Asia, noted that liability reserves could function like bank insurance, restoring trust but potentially raising operational costs for exchanges. Meanwhile, Japan's wealth managers are preparing to launch the country's first crypto-based investment trusts, signaling growing institutional confidence.

The FSA's reforms reflect a balancing act: strengthening investor protection while fostering innovation in a market that now counts over 12 million accounts according to industry analysis. As the 2026 legislative session approaches, the final shape of the reserve requirements-and their impact on Japan's crypto ecosystem-will depend on how effectively regulators can harmonize safety with scalability.