Japan’s New Crypto Regulations Mandate Liability Reserves for Exchanges

Reports emerged from Nikkei and major crypto outlets detailing plans by the Financial Services Agency (FSA) to introduce mandatory “liability reserves” for registered crypto exchanges.

These reserves would ensure quick compensation for customers in the event of hacks, unauthorized asset outflows, or operational failures. The proposal is part of a broader regulatory overhaul submitted to parliament in 2026, aiming to align the crypto sector more closely with traditional finance standards.

While not yet law as of now, it’s expected to take effect in 2026, potentially reshaping how exchanges operate by increasing costs but boosting user trust. Exchanges must maintain dedicated funds scaled to their size and risk.

For instance, platforms with ¥1 trillion in annual trading volume could need up to ¥20 billion about $128 million in reserves, with overall caps potentially reaching ¥40 billion for larger firms. This mirrors rules for securities firms, where reserves cover mishandled trades.

To ease compliance—especially for smaller exchanges—firms can offset reserves with insurance policies, creating a hybrid model that reduces the cash burden while maintaining protection.

The rules would require registration of third-party wallet providers and custodians, stricter asset segregation, and faster insolvency procedures to return customer funds. Some stablecoins or high-risk tokens might also face reclassification under the Financial Instruments and Exchange Act, adding insider trading bans and audits.

Japan has a history of major breaches that exposed regulatory gaps in Mt. Gox hack in 2014. The infamous hack led to bankruptcy and a decade-long repayment saga for 740,000+ BTC stolen.

DMM Bitcoin (May 2024): North Korea-linked hackers stole 4,502 BTC ¥48.2 billion or ~$308 million, highlighting vulnerabilities despite cold storage mandates. Bybit hack in February 2025, resulted in a $1.46 billion loss from a security breach.

BI Crypto (October 2025): $21 million stolen. Current laws under the Payment Services Act enforce cold wallets, AML checks, and fund separation, but lack dedicated compensation mechanisms—leaving users waiting years for reimbursements.

This proposal addresses that by ensuring “rapid” payouts, drawing from post-hack delays that eroded confidence. Higher operational costs could squeeze margins, particularly for smaller players, but the insurance workaround might help. Larger firms like bitFlyer or Coincheck may adapt quickly, potentially using models like Binance’s Secure Asset Fund.

Enhanced protection could drive retail adoption—Japan already has 15+ million crypto users—and attract institutional investors, especially with recent tax cuts on gains down to 20% for holdings over five years.

This aligns Japan with global trends, like the EU’s MiCA framework or Hong Kong’s insurance mandates, positioning it as a safer hub amid rising crypto crime, Chainalysis reported Japan in its 2025 mid-year crime update. However, it might slow innovation if over-regulated.

Bybit, MEXC, BingX, KuCoin currently dominate high-leverage altcoin trading for Japanese users via VPNs. Once local exchanges become demonstrably safer and offer competitive products, the FSA is likely to intensify crackdowns on unregistered foreign platforms.

Large user migration back onshore by 2027–2028. Japan will be seen as the “safest” major jurisdiction for retail crypto stricter than Singapore/Hong Kong, clearer than the U.S..

Likely to attract global exchanges to set up licensed Japanese subsidiaries Kraken, Coinbase, and OKX have already expressed interest. Exchanges might take slightly more risk knowing they have a backstop. Reduced competition ? worse UX and innovation in some areas.

Overall, this shift underscores Japan’s “safety-first” approach to crypto, learned from past traumas. If enacted, it could set a precedent for other Asian markets.