Japan has approved one of its most significant cryptocurrency regulatory overhauls in years, passing legislation that will formally classify digital assets as financial assets rather than payment instruments.

The move tightens oversight of the rapidly growing sector, extends insider trading rules to crypto markets and further integrates digital assets into Japan’s mainstream financial system.

The amendment, passed by Japan’s parliament and reported by public broadcaster NHK on Wednesday, removes cryptocurrencies from the country’s Payment Services Act framework and places them under a financial asset classification. The new regime is expected to come into force within a year, giving regulators, exchanges and market participants time to adapt to the tougher compliance requirements.

The reform marks an important shift in how Japan views cryptocurrencies. When the country first introduced comprehensive crypto regulations after the 2014 collapse of Mt. Gox, lawmakers primarily treated digital assets as a means of payment. More than a decade later, cryptocurrencies have evolved into investment products held by millions of retail and institutional investors, prompting regulators to align the legal framework with how the assets are actually used.

Under the revised rules, cryptocurrencies will become subject to stricter financial market regulations, including insider trading laws that prohibit trading based on material non-public information. The legislation also imposes tougher penalties on firms conducting unregistered cryptocurrency trading, strengthening enforcement against unauthorized operators and reinforcing Japan’s licensing regime.

The expansion of insider trading rules addresses one of the crypto industry’s longstanding regulatory gaps. Unlike traditional stock markets, cryptocurrency markets have historically operated with limited restrictions on the use of confidential information, creating concerns about market integrity and investor protection. Bringing digital assets under financial market rules is expected to improve transparency and align crypto trading more closely with established securities markets.

The reform comes as cryptocurrency adoption continues to accelerate in Japan. The number of user accounts on domestic cryptocurrency exchanges has risen steadily over recent years, supported by growing retail participation, improving market infrastructure and broader public acceptance of digital assets. Domestic exchanges and global crypto companies have also been expanding their products and services as competition intensifies for Japanese investors.

Institutional participation in cryptocurrencies has increased significantly following the launch of regulated crypto investment products in several major markets, while governments worldwide have been strengthening oversight through licensing requirements, anti-money laundering rules and tougher market conduct standards.

Japan has long been regarded as one of the world’s most mature cryptocurrency regulatory jurisdictions. Following the failure of Tokyo-based Mt. Gox, which at the time handled the majority of global Bitcoin trading, Japan became one of the first countries to introduce mandatory licensing for cryptocurrency exchanges. Operators were required to register with regulators, maintain customer asset segregation, strengthen cybersecurity, and comply with stringent anti-money laundering standards.

The latest amendment builds on that regulatory foundation by treating cryptocurrencies less as payment tools and more as financial investment assets. The change reflects the growing role digital assets play in investment portfolios rather than day-to-day commerce.

Analysts believe the tighter regulatory framework could also encourage greater institutional participation. Pension funds, asset managers and other professional investors have generally preferred markets with clear legal definitions, robust investor protections and established market conduct rules. By placing cryptocurrencies within a financial asset framework, Japan may make its digital asset market more attractive to institutional capital while enhancing confidence among retail investors.

The changes are also likely to raise compliance costs for cryptocurrency exchanges and trading platforms. Companies will need to strengthen surveillance systems, enhance internal controls and ensure they meet stricter reporting and governance standards. Smaller operators could face greater regulatory burdens, while larger, licensed exchanges may benefit from higher barriers to entry and increased investor trust.

The legislation also underscores Japan’s broader strategy of encouraging financial innovation while maintaining regulatory discipline. Rather than imposing sweeping restrictions on digital assets, policymakers have generally opted for a framework that allows the industry to grow under close supervision, balancing technological innovation with financial stability and consumer protection.

The amendment comes as countries around the world are revisiting their cryptocurrency regulations amid rapid growth in digital asset markets. Authorities in the United States, the European Union, Singapore and Hong Kong have all moved to strengthen oversight of crypto trading, custody and market conduct as digital assets become increasingly integrated into the global financial system.