Japan’s Crypto Overhaul Pits Investor Protection Against Market Realities

Japan’s Financial Services Agency (FSA) has proposed a significant shift in the regulatory framework for cryptocurrencies, suggesting their integration under the Financial Instruments and Exchange Act (FIEA) instead of the current Payment Services Act. The move, discussed in a September 2 working group of the Financial System Council, aims to align crypto regulation with securities law, thereby enhancing investor protection and transparency [1]. The FSA believes this transition would better reflect the evolving role of cryptocurrencies as investment products rather than merely payment tools [2].

Under the proposed framework, crypto assets would be grouped with securities, necessitating stricter compliance and disclosure requirements for issuers and exchanges. This change is intended to mitigate market misconduct and address long-standing concerns such as unclear white papers, misleading disclosures, and unregistered operations. The FSA emphasized that the shift would not eliminate the use of cryptocurrencies for payments but would reframe their regulatory treatment to reflect their growing prominence in investment portfolios [2]. To prevent regulatory overlap, the agency also suggested removing Payment Services Act provisions that would otherwise impose duplicate compliance burdens [1].

The proposal has sparked debate among experts and industry participants. Naoyuki Iwashita, a former director at the Bank of Japan, expressed caution about extending the securities framework to all crypto assets, particularly highlighting the risks associated with Initial Exchange Offerings (IEOs). According to data from the Japan Crypto Asset Business Association, nearly all domestic IEOs have lost substantial value, with some tokens dropping over 90% from their issuance price. Iwashita warned that classifying such assets under the FIEA could be misleading, as it may imply a level of stability or legitimacy inconsistent with the actual market performance [1].

Despite these concerns, the FSA remains confident that the FIEA’s mechanisms can effectively address key challenges in the crypto market, including security vulnerabilities, fraud, and information asymmetry between issuers and investors. The agency pointed to Japan’s rapidly growing crypto sector, with over 12 million accounts opened at domestic exchanges and user deposits exceeding 5 trillion yen ($33.7 billion). Notably, the majority of these accounts are held by small-scale traders, with over 80% holding less than $675, highlighting the need for strong investor protections [2].

The FSA’s proposal aligns with broader government efforts to position cryptocurrencies as part of a diversified investment strategy. Finance Minister Katsunobu Kato recently acknowledged the potential role of crypto assets in investment portfolios, noting that, while volatile, they can contribute to financial diversification if properly regulated. The FSA is expected to submit the legislative changes to the ordinary Diet session in the coming year [2].

Source:

[1] Japan Considers Merging Crypto Oversight Into Securities ... (https://www.mitrade.com/insights/news/live-news/article-3-1090457-20250903)

[2] Japan regulator proposes crypto rule overhaul in line ... (https://cointelegraph.com/news/japan-crypto-regulation-overhaul-securities-law)