Japan Elevates Crypto to Financial Product Status With Reserve Mandate

Japan's Financial Services Agency (FSA) is preparing to mandate that cryptocurrency exchanges maintain liability reserves to protect customers from losses stemming from hacks and operational failures, a move aimed at restoring trust in the sector following a string of high-profile breaches. The FSA plans to submit legislation to parliament in 2026, requiring exchanges to set aside reserves for compensating users in the event of cyberattacks or other incidents. The proposed rules would mirror requirements for traditional securities firms, which currently hold reserves ranging from $12.7 million to $255 million (¥2 billion to ¥40 billion) depending on trading volume.

The initiative follows years of turmoil in Japan's crypto market, including the 2014 collapse of Mt. Gox, where hackers drained 850,000 BTC, and more recent breaches such as the $305 million theft from DMM Bitcoin in May 2024 and a $21 million heist from SBI Crypto in October 2025 according to reports. These incidents have underscored vulnerabilities in outsourced wallet-management systems and highlighted the need for formal procedures to return assets in bankruptcy scenarios, including allowing court-appointed administrators to manage payouts as experts point out.

The FSA's proposed framework would eliminate the current exemption allowing exchanges to avoid reserve requirements by storing customer funds in offline cold wallets according to the FSA. Instead, exchanges would be required to segregate customer assets and establish formal insolvency protocols. To ease financial burdens, regulators are considering allowing exchanges to meet obligations through insurance rather than holding full cash reserves according to financial analysts. This approach aligns with global trends, such as the European Union's MiCA regime and Hong Kong's insurance-based safeguards for crypto assets according to industry experts.

Experts argue the measures could bolster user confidence but may increase operational costs for exchanges. "Liability reserves function like insurance for bank accounts," said Musheer Ahmed, founder of Finstep Asia. "However, the capital requirements will make it relatively more expensive to operate crypto exchanges." Ahmed emphasized the need for "high-grade security setups, at least at the same level as traditional finance," and suggested derivative-style insurance products as interim solutions according to Ahmed.

The FSA is also scrutinizing third-party vendors providing wallet-management systems, requiring them to file prior notices with regulators to address concerns over outsourced software becoming a critical weak link. This comes as Chainalysis reported Japan, Indonesia, and South Korea as the Asia-Pacific region's top victims of crypto thefts in 2025 according to Chainalysis.

Japan's regulatory approach reflects a broader shift in treating digital assets as financial products rather than mere payment instruments. The country is also revising its tax policies to encourage regulated participation and is considering stricter audit requirements for companies pivoting to large digital asset treasuries according to industry sources. By imposing capital buffers and aligning crypto oversight with traditional finance, Japan aims to stabilize its market while maintaining its position as a global fintech innovation hub according to market analysts.