Introduction of stricter rules for crypto exchanges in Japan
Japan is in the process of introducing significant changes to cryptocurrency regulation following renewed attention to Mt. Gox-related repayment activity in 2024.
The Financial Services Agency (FSA) plans to introduce new rules requiring cryptocurrency exchanges to maintain special “liability reserves” to protect customers if their assets are lost due to hacks or unauthorized transfers. The measures aim to bring the cryptocurrency sector closer to the strict standards applied to traditional financial institutions in Japan, one of the world’s most heavily regulated markets.
As of Dec. 9, 2025, under the Payment Services Act, registered cryptocurrency exchanges in Japan must comply with strict requirements. These include asset custody, accounting, separation of client funds, Anti-Money-Laundering (AML) controls and cold storage rules. However, there is still no legal obligation for exchanges to hold dedicated funds to compensate customers after a hack or unauthorized outflow. The FSA and its advisory Financial System Council have concluded that this gap in protection needs to be closed.
Japan has a history of major failures and consumer losses in the crypto industry. The 2014 hack of Mt. Gox, in which over 740,000 Bitcoin (BTC) was stolen, resulted in the exchange’s bankruptcy and a repayment process that is still ongoing. In May 2024, the Japanese exchange DMM Bitcoin lost 4,502.9 BTC due to a major theft. These incidents showed that customers remain vulnerable even with strong safeguards such as mandatory cold wallet storage.
What the proposed liability reserve rules require
The new rules will require exchanges to maintain dedicated funds to compensate customers in the event of security breaches.
A statutory obligation to set aside liability reserves
According to a report in The Nikkei, the draft legislation will require all registered cryptocurrency exchanges to hold liability reserves. These reserves will be used to repay customers if assets are lost through unauthorized transfers. The requirement will apply even to funds kept in cold wallets, ending the previous assumption that offline storage alone provides sufficient protection.
Benchmarking reserves to Japan’s securities industry rules
The FSA plans to base the size of these reserves on standards already used for securities firms in Japan. Traditional securities companies must maintain reserves ranging from 2 billion to 40 billion Japanese yen, depending on their size, risk profile and activity level.
Insurance may be allowed as an alternative
To reduce the burden on smaller operators, the FSA is considering allowing exchanges to meet some or all reserve requirements through approved insurance policies instead of holding only cash or liquid assets. Details such as acceptable policy types, minimum coverage levels and approved insurers are still under discussion.
Liability reserve is part of a wider regulatory overhaul
The liability reserve rule is only one part of a broader set of reforms. Other proposed changes include:
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Requiring third-party wallet providers, custodians and trading system operators to register with regulators.
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Reclassifying certain cryptocurrencies under the Financial Instruments and Exchange Act would impose stricter securities-style rules, such as audits and disclosure requirements.
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Improving insolvency procedures so that customers can receive compensation more quickly, potentially from liability reserves or insurance.
Did you know? South Korea’s 2021 regulations forced exchanges to partner with licensed banks, implement real-name accounts and meet strict AML checks. This reduced the number of active exchanges from hundreds to fewer than 20 within months.
Why regulators are pursuing this framework
The primary goals are stronger customer protection, greater market confidence and the elimination of remaining regulatory weaknesses:
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Boosting customer protection: Hacking incidents and subsequent repayment delays have shown the need for faster compensation mechanisms. Liability reserves will ensure that exchanges have funds immediately available instead of forcing customers to wait through lengthy bankruptcy proceedings.
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Restoring and maintaining market trust: Japan is working to align cryptocurrency rules more closely with those of the securities industry. With this policy, the country aims to position itself as a secure jurisdiction for digital assets and offset the reputational risk created by past high-profile hacking incidents.
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Closing regulatory gaps: Cold wallet requirements reduce the risk of attack but do not remove it entirely. The new reserves add a second layer of protection that focuses on financial recovery after an incident rather than only on prevention.
Did you know? The European Union’s Markets in Crypto-Assets (MiCA) regulation harmonizes rules across 27 countries, covering licensing, reserve backing, market abuse and consumer protection. It sets the world’s first continent-wide rulebook for crypto exchanges.
Implications for exchanges and investors
The changes will affect exchanges, customers and the wider market in several ways:
Impact on exchanges
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Higher operating costs due to the need to hold substantial reserves or pay for insurance
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Difficulty for smaller exchanges to meet the requirements, which may lead to industry consolidation
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Additional accounting, reporting and compliance procedures.
Impact on customers
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Greater protection against losses caused by exchange failures
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Faster compensation in the event of hacks due to the dedicated financial buffer
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Overall reduction in the risks of using centralized platforms.
Impact on the broader market
Japan’s approach may influence regulatory developments in other countries. Exchanges worldwide are likely to adopt more professional custody and risk management practices.
Did you know? US crypto exchanges face a patchwork of state-level rules, including the New York BitLicense, money transmitter laws and federal oversight for certain assets. This fragmentation makes compliance one of the most complex globally.
What remains unclear
Many key details of the proposed regulations are still being finalized. These will depend on the forthcoming Financial System Council report and the 2026 legislation.
The unresolved issues include:
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The exact method for calculating each exchange’s reserve amount
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The extent to which insurance can replace cash reserves
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Implementation timelines and grace periods for existing exchanges
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How reserves will interact with revised insolvency procedures
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Whether the obligation will extend to cases of mismanagement, not only to hacks
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The precise monitoring and enforcement arrangements.
