Japan's FSA Considers Allowing Banks to Trade Cryptocurrencies: A Regulatory Evolution and Its Impact on Institutional Adoption

Japan's Financial Services Agency (FSA) is poised to redefine the global crypto landscape by allowing banks to trade and hold cryptocurrencies—a seismic shift from its 2020 stance, which barred such activities due to volatility concerns, according to CoinCentral. This regulatory evolution, driven by a blend of innovation and investor protection, signals Japan's ambition to become a crypto-friendly hub while addressing systemic risks. For institutional investors, the implications are profound: a maturing market infrastructure, reduced tax burdens, and clearer pathways for crypto ETFs could catalyze a new era of institutional adoption.

Regulatory Evolution: From Caution to Clarity

Japan's crypto journey began in 2017, when it became the first major economy to legally recognize digital assets as payment methods under the Payment Services Act (PSA), according to Blockpass. However, high-profile incidents like the 2018 Coincheck hack exposed vulnerabilities, prompting the FSA to enforce stricter anti-money laundering (AML) protocols and mandatory exchange licensing. By 2025, the FSA has shifted its focus from mere compliance to fostering innovation.

A landmark move in this evolution is the reclassification of certain crypto assets—particularly those with investment or governance features—as securities under the Financial Instruments and Exchange Act (FIEA), as outlined in the FSA discussion paper. This shift aligns crypto with traditional financial instruments, introducing stricter disclosure requirements and enabling the creation of regulated crypto ETFs, including spot Bitcoin products, as noted by Cointelegraph. Simultaneously, the FSA is easing stablecoin regulations, allowing issuers to back tokens with government bonds and fixed-term deposits, according to The Bit Journal. These changes reflect a nuanced approach: balancing risk mitigation with market growth.

Institutional Adoption: Banks as Catalysts

The FSA's 2025 proposals could unlock unprecedented institutional participation. By permitting banks to hold cryptocurrencies like Bitcoin as investments, Japan is mirroring trends in the U.S., where institutions like BlackRock and JPMorgan have already integrated crypto into their portfolios, as CoinCentral reports. This move is underpinned by new capital adequacy standards and risk management frameworks, ensuring banks can navigate crypto's volatility without destabilizing the broader financial system, CoinCentral also notes.

Tax reforms further amplify this momentum. Japan's proposed shift from a 55% progressive tax on crypto gains to a flat 20% capital gains tax—effective in 2026—reduces the burden on investors and incentivizes long-term holding, according to Cointelegraph. According to Chainalysis, Japan's crypto user base grew by 120% in 2025, a surge attributed to regulatory clarity and the rise of crypto ETFs. This growth trajectory suggests that Japan's market is not only attracting retail investors but also positioning itself as a magnet for institutional capital.

Market Impact and Global Competitiveness

The FSA's reforms are poised to enhance Japan's competitiveness in the global crypto arena. By introducing a two-tiered disclosure system—distinguishing between project-backed tokens and assets like Bitcoin—the FSA is creating a regulatory environment that accommodates both innovation and stability, as outlined by Cointelegraph. Additionally, the agency's engagement with international regulators and initiatives like the DeFi Study Group underscore its commitment to aligning with global standards, as Blockpass describes.

However, challenges remain. While the FSA's risk management requirements for banks are robust, the inherent volatility of crypto markets could test institutional resolve. Moreover, the reclassification of tokens under FIEA may lead to regulatory overlaps, requiring continuous refinement.

Conclusion

Japan's regulatory evolution represents a masterclass in balancing innovation with caution. By allowing banks to trade cryptocurrencies, reclassifying assets under securities law, and reforming tax policies, the FSA is laying the groundwork for a mature, institutional-grade crypto market. For investors, this means a more liquid, legitimate, and accessible ecosystem—one that could rival the U.S. and Europe in the coming years. As the FSA continues to refine its framework, Japan's approach may well serve as a blueprint for other nations navigating the complexities of digital assets.