On May 21, Japan’s House of Representatives officially passed a landmark cryptocurrency bill, marking a pivotal moment in the nation’s digital asset regulatory evolution. The following day, the upper chamber of the Diet accepted the legislation, paving the way for comprehensive reforms in how crypto assets are managed, traded, and protected under Japanese law.
Formally titled “The Draft Act on Amending the Act on Fund Settlement and Other Relevant Laws in Response to the Diversification of Financial Transactions Due to Advancements in Information and Communication Technology,” this legislation was developed by Japan’s Financial Services Agency (FSA). It aims to revise two core legal frameworks: the Act on Fund Settlement and the Financial Instruments and Exchange Act. These changes reflect Japan’s strategic effort to align with global regulatory standards while fostering innovation in financial technology.
Originally expected to pass by June 2020, the bill’s journey through legislative channels has culminated in 2025 with robust provisions designed to enhance consumer protection, strengthen exchange oversight, and support responsible technological development.
Core Regulatory Objectives and Government Mandates
Accompanying the bill’s approval, the House of Representatives adopted a resolution outlining 15 key directives for the Japanese government and the FSA. These mandates emphasize balanced regulation—ensuring user safety without stifling innovation.
One central requirement calls for establishing an effective inspection and supervision system for crypto assets and ICOs (Initial Coin Offerings), particularly from a user protection standpoint. Given the surge in fraudulent projects and market volatility linked to token sales, this directive underscores the need for proactive monitoring and enforcement.
The resolution also urges alignment with international standards, including G20 financial regulations and anti-money laundering (AML) protocols set by the Financial Action Task Force (FATF). Regulators are instructed to assess real-world outcomes regularly and adjust policies accordingly. This adaptive approach ensures that Japan remains both compliant and competitive in the global fintech landscape.
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Notably, the FSA is tasked with reviewing tax treatment of crypto transactions, including income derived from transferring digital assets. The agency must analyze these dynamics and implement necessary measures based on findings—potentially leading to clearer tax guidelines for individuals and businesses involved in crypto trading or DeFi activities.
Crucially, the resolution stresses that regulations should not unduly hinder technological progress. The document acknowledges that blockchain and distributed ledger technologies “may contribute significantly to Japan’s industrial development,” urging regulators to maintain a forward-looking, innovation-friendly stance.
Additionally, specific attention is given to ICO policy development, calling for Japan to actively participate in international discussions and establish clear, proportionate rules. With diverse participants entering the space—from startups to institutional investors—the FSA is advised to avoid overregulation while remaining prepared to respond swiftly to emerging risks.
Impact on Cryptocurrency Exchanges
Japan currently recognizes 19 licensed crypto exchanges, with over 140 additional companies expressing interest in entering the market. Under the new law, existing registered crypto asset brokers do not need to reapply for licensing. However, they must upgrade their internal systems to comply with newly mandated obligations.
The FSA emphasized ongoing monitoring: “We will continue observing various operational scenarios to ensure these firms maintain compliant and resilient systems.”
Key compliance requirements include:
- Mandatory use of cold wallets for customer fund storage.
- Segregation of hot wallet funds, where any assets held online must be backed by equivalent reserves from other secure payment sources.
- Prior notification to the FSA when adding or replacing tradable cryptocurrencies on platforms.
These measures aim to prevent incidents like the 2014 Mt. Gox and 2018 Coincheck hacks, which collectively resulted in billions of yen worth of lost digital assets. By enforcing cold storage protocols and reserve backing, Japan reinforces its reputation as a secure jurisdiction for crypto investment.
Furthermore, exchanges must now adhere to stricter advertising and solicitation rules. Misleading labels, speculative hype, and promotional content encouraging reckless trading are explicitly prohibited. This clampdown targets aggressive marketing tactics observed in recent years, especially those targeting inexperienced retail investors.
For privacy-focused coins—such as Monero or Zcash—that offer high anonymity, exchanges must notify the FSA before listing or altering their handling procedures. This allows regulators to evaluate potential AML risks associated with such assets.
Key Areas of Legal Reform
The revised legislation incorporates recommendations from FSA-convened research panels, introducing several structural changes:
1. Rebranding “Virtual Currency” as “Crypto Asset”
A symbolic yet significant shift: replacing the term “virtual currency” with “crypto asset” across legal texts. This change reflects a more accurate classification, acknowledging that most tokens function as investment vehicles or utility instruments rather than pure mediums of exchange.
2. Recognition of ICO Rights
The law formally grants rights to receive income distributions through ICOs. This legitimizes tokenized equity models and revenue-sharing mechanisms, offering legal clarity for blockchain startups raising capital via token sales.
3. Margin Trading Regulation
Approximately 80% of domestic crypto trading volume involves leveraged positions. Now, margin trading falls under the purview of the Financial Instruments and Exchange Act, subjecting it to rules similar to foreign exchange (FX) trading. This includes limits on leverage ratios, mandatory risk disclosures, and client suitability assessments.
4. Self-Regulatory Organization (SRO) Collaboration
The FSA will work closely with approved SROs to enforce industry standards. While only one SRO has been recognized so far—the Japan Virtual Currency Exchange Association (JVCEA)—the framework allows for future expansion of self-governance within the sector.
5. Investor Protection Measures
To safeguard users during exchange insolvency, the law mandates that customer crypto assets be returned on a priority basis. It also prohibits unfair practices such as market manipulation, insider trading, and front-running—aligning crypto markets with traditional securities oversight.
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Frequently Asked Questions (FAQ)
Q: Does the new law ban anonymous cryptocurrencies?
A: No, it does not ban them outright. However, exchanges must notify the FSA before listing or modifying handling procedures for privacy coins, allowing regulators to assess AML compliance.
Q: Are existing crypto exchanges required to re-register?
A: No. Licensed brokers retain their status but must upgrade systems to meet new security, reporting, and disclosure obligations.
Q: How will taxes on crypto gains be affected?
A: The FSA is reviewing tax implications of crypto transfers and income distribution rights. While no immediate changes are confirmed, clearer guidelines may emerge based on regulatory analysis.
Q: What is the purpose of renaming ‘virtual currency’ to ‘crypto asset’?
A: The reclassification better reflects the economic function of most tokens—as investments or utilities—rather than everyday payment tools.
Q: Is margin trading still allowed?
A: Yes, but it's now regulated under financial instruments law with stricter rules on leverage, risk management, and investor suitability.
Q: How does Japan’s approach compare internationally?
A: Japan’s framework closely follows G20 and FATF recommendations, positioning it as a leader in balanced, innovation-supportive regulation.
Final Thoughts
Japan’s passage of this comprehensive crypto legislation signals a mature regulatory approach—one that prioritizes investor protection, systemic stability, and technological advancement in equal measure. By integrating international standards, enhancing exchange accountability, and supporting legitimate blockchain innovation, Japan strengthens its role as a trusted hub in the global digital economy.
As markets evolve and new financial products emerge—such as tokenized securities and decentralized finance applications—Japan’s adaptive legal framework positions it well for future challenges and opportunities.
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