Japan Ponders Crypto's Future: Investor Protection vs. Market Reality

Japan’s Financial Services Agency (FSA) has proposed a major overhaul of cryptocurrency regulation, seeking to shift oversight from the Payment Services Act to the Financial Instruments and Exchange Act (FIEA). The move aims to align crypto assets with securities regulations, strengthening investor protections and addressing growing concerns around market misconduct and information asymmetry [1]. The FSA emphasized that many issues in the crypto market—such as unclear white papers, inaccurate disclosures, and unregistered operations—mirror those traditionally addressed under the FIEA, making the shift both appropriate and necessary [2].

The FSA’s proposal, outlined in an internal briefing document, is not yet legally binding but represents the agency’s formal recommendation to Japan’s Financial System Council. If approved, the change would impose new disclosure requirements on crypto issuers and exchanges, particularly for public offerings and secondary distributions. This would require greater transparency from market participants and help mitigate risks for retail investors [1]. The FSA also highlighted that the FIEA framework would allow for stricter enforcement against unfair trading practices, including the use of emergency injunctions against unregistered businesses [1].

The regulatory shift comes as crypto continues to gain traction in Japan, with over 12 million accounts opened at domestic exchanges and user deposits exceeding 5 trillion yen ($33.7 billion). Despite the high account volume, the FSA noted that small-scale trading dominates, with more than 80% of individual accounts holding less than $675. Additionally, 7.3% of investors with experience in other asset classes hold crypto, a higher rate than those trading foreign exchange or corporate bonds [1]. The majority of crypto holders in Japan are middle-income earners, and 86% of users trade with the expectation of long-term price gains [1].

Finance Minister Katsunobu Kato has voiced support for including crypto in diversified investment portfolios, acknowledging its potential despite its volatility. “By establishing a proper investment environment, they can become an option for diversified investment,” he stated in late August [1]. This perspective aligns with the FSA’s view that the FIEA would enhance investor confidence by reducing information gaps and imposing clearer operational standards on crypto firms.

However, the proposal has also faced skepticism from some experts. Naoyuki Iwashita, a Kyoto University professor and former Bank of Japan official, questioned the applicability of the FIEA to all crypto assets, particularly primary tokens like Bitcoin and Ethereum. He noted that applying securities rules to these tokens may not significantly alter their market dynamics but cautioned against extending the framework to all tokens, especially those with poor performance records. Iwashita cited data showing that nearly all domestic Initial Exchange Offerings (IEOs) have lost substantial value, with some tokens losing over 90% of their original price [2]. He argued that classifying such assets as securities suitable for public investment under the FIEA would be “unthinkable.”

The FSA plans to submit legislative amendments to the ordinary Diet session next year, which will determine the next steps for regulatory reform. If adopted, the move will mark a significant shift in Japan’s approach to crypto, potentially influencing similar regulatory strategies in other jurisdictions [2].

Source:

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

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