Japan's slow crypto approvals drive liquidity offshore, experts warn

Japan’s regulatory environment is increasingly viewed as a key obstacle to cryptocurrency adoption, with experts emphasizing that sluggish approval processes are deterring innovation and driving liquidity offshore. Maksym Sakharov, co-founder and CEO of Web3 firm WeFi, highlighted that Japan’s “slow, prescriptive, and risk-averse” approval culture—rather than proposed tax policies—is the primary reason crypto startups and liquidity providers are relocating to other markets [1]. The current two-step regulatory framework, involving initial review by the Japan Virtual and Crypto Assets Exchange Association (JVCEA) and final oversight by the Financial Services Agency (FSA), can extend go-to-market timelines to 6–12 months or longer, according to Sakharov. This bureaucratic bottleneck forces many Japanese teams to list their tokens overseas first, eroding the country’s competitive edge.

Sakharov contrasted Japan’s approach with regulatory models in Singapore, the United Arab Emirates, and South Korea. He noted that while Singapore maintains strict standards, it offers clearer pathways for innovation, while the UAE prioritizes speed in approvals. South Korea’s Virtual Asset User Protection Act (VAUPA) focuses on ongoing obligations rather than pre-approval requirements, enabling faster listings [1]. Japan’s reliance on pre-approval mechanisms and the absence of a dynamic regulatory sandbox hinder experimentation, particularly in areas like staking and governance, which are critical for modern crypto ecosystems.

The proposed 20% flat tax on crypto gains and reclassification of digital assets as financial products are unlikely to resolve these issues without cultural reforms in regulatory processes, Sakharov warned. He emphasized that Japan’s system is designed to mitigate risks rather than accelerate innovation, with delays in token screening, IEO white paper vetting, and product change notifications often requiring multiple revisions [1]. This rigidity contrasts with jurisdictions like Hong Kong, which recently launched the Ensemble Sandbox to fast-track regulatory innovation, and the UAE, where progressive tokenization frameworks attract global fintech firms [1].

To address these challenges, Sakharov recommended reforms such as “time-boxed, risk-based approvals,” the establishment of a functional sandbox to support experimentation, and proportional disclosure requirements. Without such changes, he argued, domestic crypto projects will continue to scale abroad, driven by uncertainty and prolonged wait times rather than tax burdens [1]. The situation underscores a broader risk: Japan’s advanced technological infrastructure and investor interest in digital assets may not translate into leadership in crypto adoption if regulatory agility remains stagnant.

Japan’s regulatory landscape reflects a systemic resistance to rapid change, rooted in hierarchical decision-making and paper-based workflows. While stability and consumer protection are essential, the current approach risks alienating entrepreneurs and capital. Experts suggest integrating AI and blockchain tools to automate compliance checks and reduce bureaucratic delays, as outlined in a 2025 MDPI study [2]. Such technologies could enforce rules instantly, streamlining processes akin to property leases—though their application to crypto approvals remains untested.

The implications for Japan’s crypto ecosystem are clear: prolonged regulatory delays could drive talent and capital to jurisdictions with more adaptable frameworks. For instance, Japanese startups have already relocated to Singapore, where regulatory clarity and faster approvals offer a competitive advantage. This exodus threatens to undermine Japan’s potential as a global digital finance hub, particularly as other nations aggressively position themselves for the future of tokenization.

Sources:

[1] [Japan’s ‘slow’ approval culture stifles crypto adoption: Expert] [https://coinmarketcap.com/community/articles/6884cef47bcc423cceef7492/]

[2] [AKI2ALL: Integrating AI and Blockchain for Circular] [https://www.mdpi.com/2075-5309/15/15/2629]