Japan's Financial Services Agency (FSA) recently published a draft report outlining updated regulatory policies for the cryptocurrency sector. The proposal addresses emerging areas not currently covered by existing laws, including hack incidents, self-regulation, approved dealers, privacy coins, and margin trading.
New Framework for Crypto Regulation
Last Friday, Japan's top financial regulator, the Financial Services Agency (FSA), released a draft report detailing the nation's latest regulatory approach to cryptocurrencies and Initial Coin Offerings (ICOs). The document incorporates recommendations from the FSA's 11th Study Group Meeting, building upon discussions from previous sessions. Local media reports indicate the measures face minimal opposition, suggesting imminent regulatory drafting.
A key focus area involves preventing and managing hack incidents, such as January's Coincheck breach and September's Zaif exchange attack. The FSA will require exchanges to strengthen custody solutions for client assets (e.g., private key management). For consumer protection, exchanges must maintain net assets equivalent to or exceeding:
- The value of currencies lost in hacks
- Required repayment funds
The document also outlines bankruptcy contingency plans for crypto exchanges.
Self-Regulatory Measures
Recognizing rapid technological innovation, the FSA emphasized collaboration with certified self-regulatory organizations:
"We urge industry participants to join accredited self-regulatory associations and develop compliant systems according to their rules."
In October 2022, the Japan Virtual Currency Exchange Association (JVCEA) became the first FSA-certified self-regulatory body for crypto exchanges.
The report clarifies that the FSA may deny or revoke registration for operators who neither join accredited associations nor establish internal compliance systems.
Approved Dealers Framework
The draft addresses "approved dealers"—companies with pending applications to operate crypto exchanges while continuing business under review. Current examples include Coincheck, Lastroots, and Everybody's Bitcoin. Many such firms aggressively advertise despite lacking full licensing, potentially misleading customers.
Proposed countermeasures include:
- Freezing business expansion until licensing completes
- Prohibiting new token listings
- Banning new client acquisition campaigns
- Mandating clear registration status disclosures on official websites
Additional Regulatory Provisions
Other proposed restrictions target:
- Privacy coin listings
- Derivatives trading
- Margin trading activities
The report also examines ICO oversight, suggesting:
"The Securities Exchange Act may apply to ICOs, with potential enforcement through the Financial Instruments and Exchange Act or Fund Settlement Act depending on token structure."
It recommends third-party organizations establishing monitoring frameworks to review token issuers' financial and operational conditions.
The proposal further covers unregulated crypto custody services, suggesting:
- Implementing registration systems
- Maintaining internal controls
- Publishing hack response protocols
- Holding repayment reserves
- Segregating exchange, client, and cryptocurrency assets
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FAQ: Japan's Crypto Regulation Updates
Q1: When will Japan's new crypto regulations take effect?
A1: With minimal opposition reported, the FSA is expected to begin formal rulemaking shortly after finalizing the draft.
Q2: How do the rules protect consumers from exchange hacks?
A2: Exchanges must hold equivalent assets to cover hack losses and maintain repayment funds, plus implement enhanced key management.
Q3: Can unlicensed exchanges still operate in Japan?
A3: Approved dealers may continue during application review but face growth restrictions until fully licensed.
Q4: What happens to privacy-focused cryptocurrencies?
A4: The draft proposes limitations on listing privacy coins, though specifics remain under discussion.
Q5: Are ICOs banned under the new rules?
A5: No, but they'll face securities-like regulation based on token structure and fundraising methods.
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This analysis reflects current regulatory developments and may be updated as policies evolve.
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