Japan Equips Crypto Exchanges with Conventional Financial Protections

The Financial Services Agency (FSA) of Japan has unveiled a major regulatory reform that will require all authorized cryptocurrency exchanges to hold liability reserves, aiming to protect users from losses due to hacks, fraud, or operational mishaps. This new regulation, scheduled for introduction during the 2026 regular parliamentary session,

toward harmonizing crypto oversight with established financial protections and addressing the fallout from recent high-profile exchange failures.

Reserve levels will be determined by each platform’s trading activity and history of incidents, with approved insurance policies permitted to offset some of the required reserves. This strategy is designed to guarantee swift compensation for affected users without depending on government bailouts,

in light of events such as the 2024 DMM breach, which resulted in the theft of $305 million (48.2 billion yen). The FSA’s Financial System Council is currently finalizing the calculation methods and enforcement details ahead of the bill’s drafting, focusing on a risk-based model tailored to the specific challenges of the crypto sector.

This regulatory update is part of a wider legislative initiative that will redefine cryptocurrencies as financial instruments under the Financial Instruments and Exchange Act.

, such as prohibitions on insider trading, more rigorous custody checks, and stricter disclosure requirements, aligning crypto exchanges more closely with the regulatory framework for traditional securities brokers. The FSA’s approach is modeled after current requirements for securities firms, which must maintain reserves between 2 billion and 40 billion yen. For crypto exchanges, the specific reserve amounts are still under review but are expected to follow similar risk management standards.

The response from industry participants is mixed. Larger operators like bitFlyer and Coincheck, which already have voluntary reserves or insurance in place, are better equipped to meet the new requirements. Smaller exchanges, on the other hand, may struggle with the increased costs, potentially accelerating market consolidation. The FSA’s decision to allow insurance as a means of compliance is viewed as a practical solution, balancing the need for investor protection with operational flexibility.

Regulators emphasize that this new rule addresses significant shortcomings in the current system. Although user asset cold storage has been mandated, it has not been enough to prevent major losses,

on emergency funding and asset liquidation to compensate customers after the 2024 incident. The introduction of liability reserves will serve as a financial safeguard, enabling prompt compensation and helping to rebuild trust in Japan’s crypto market.

Japan’s initiative further cements its status as a highly regulated yet innovation-supportive crypto hub. By integrating capital reserves, insurance, and enhanced oversight, the FSA seeks to create a robust environment for both investors and businesses. As the 2026 legislative session nears, industry stakeholders are watching closely, especially regarding how reserve requirements and insurance standards will be uniformly applied across the sector.