Japan to Reclassify Crypto Under Securities Law, Spurring Stricter Oversight

Japan is set to reclassify cryptocurrencies under its securities law, moving them from the Payment Services Act (PSA) to the Financial Instruments and Exchange Act (FIEA). The shift, outlined in a report by the Financial System Council's Working Group, signals a broader recognition of crypto as an investment product rather than a payment mechanism. The move aims to align regulatory oversight with the evolving use of crypto assets in financial markets and to enhance investor protection.

The Financial Services Agency (FSA) has emphasized the growing importance of crypto in investment portfolios and the need to strengthen disclosures and transparency in token offerings according to recent analysis. The proposed changes include stricter rules for initial exchange offerings (IEOs), requiring pre-sale disclosures, independent code audits, and identity verification of issuers.

Exchanges will now be expected to act as gatekeepers, ensuring users receive clear information about token projects. This shift mirrors global regulatory trends, particularly in Europe and South Korea, where crypto is increasingly governed under securities laws.

Under the new framework, IEOs will be subject to enhanced regulatory scrutiny. Exchanges will be required to provide detailed information on the core teams, token economics, and use of proceeds. Independent third-party audits will be mandatory, and self-regulatory organizations will play a more prominent role in reviewing new listings.

The FSA's report also highlights the importance of risk management for users. Exchanges will be required to assess users' risk tolerance before allowing them to trade high-volatility tokens. Additionally, new investment limits will be introduced for un-audited token offerings, reducing the risk of sudden price swings impacting retail investors.

Cracking Down on Unregistered Platforms and Insider Trading

One of the key objectives of the regulatory shift is to expand enforcement capabilities against unregistered platforms. This includes overseas exchanges and decentralized exchanges that operate without proper oversight. The FSA is seeking the authority to issue emergency injunctions and enforce broader compliance measures for platforms targeting Japanese users.

The proposed framework also introduces explicit insider-trading rules for crypto assets. These rules will apply to individuals in positions of influence who possess non-public information about specific tokens. Insiders will be prohibited from trading before such information is made public.

Regulators are also pushing for stronger penalties for unregistered businesses. Criminal penalties could include up to five years in prison and fines of up to 5 million yen. The move is expected to bring Japan's regulatory approach closer to the Markets in Crypto-Assets (MiCA) framework being developed in the European Union.

What This Means for the Industry

The transition to FIEA regulation will require exchanges, issuers, and service providers to adapt to a more complex compliance environment. Lending businesses that handle crypto assets will now fall under the FIEA and will need to implement stronger risk and safety management systems.

Traditional financial institutions are also expected to play a larger role in the crypto space. While banks and insurance companies will remain barred from running exchanges directly, they may offer crypto trading through regulated subsidiaries. This could lead to increased institutional participation in the market.

The FSA is also exploring new tax reforms that could reduce the top capital-gains tax rate on crypto trading from 55% to a flat 20%. This change, if implemented, would simplify reporting for individual investors and bring crypto taxation in line with traditional securities.

Risks to the Outlook

Despite the FSA's proactive stance, some challenges remain. The regulatory shift may create compliance burdens for smaller exchanges and startups, potentially slowing innovation in the sector. Additionally, the FSA has warned against the risks of crypto-linked derivatives tied to overseas ETFs, stating that such products could pose significant risks to retail investors.

The FSA also highlighted the need for greater transparency in decentralized projects, where the lack of identifiable issuers has historically been a regulatory blind spot. Under the new rules, even fully decentralized assets will be subject to stricter disclosure requirements, placing more responsibility on exchanges to vet projects.

As Japan moves toward a more robust regulatory framework for crypto, the focus remains on balancing innovation with investor protection. The FSA's proposed changes are expected to be formalized during the 2026 regular Diet session, with a transition period provided for industry adaptation.