How Will the Transition of Crypto Assets to the Financial Instruments and Exchange Act Change Practices? Insights into Next-Generation Compliance Requirements from the Financial Services Agency's Working Group Report
In recent years, the technological innovations and market environment surrounding crypto assets have been remarkable, and Japan’s legal system has also undergone dramatic changes to align with these realities.
Previously, crypto assets such as Bitcoin were primarily noted as “means of payment” for purchasing goods and remittances. In 2016, they were incorporated into the framework of the “Payment Services Act” under Japanese law. However, following the rise of decentralized finance (DeFi) and the listing of Bitcoin ETFs, crypto assets have now firmly established themselves as “alternative investment assets” both domestically and internationally. Given that many users are currently more interested in “capital gains” rather than payments, it has become challenging to ensure investor protection and market fairness with regulations designed solely for payment infrastructure.
Addressing this historical paradigm shift from “payment to investment” head-on, the Financial System Council’s “Working Group on Crypto assets Systems” in Japan has conducted six deliberations since its establishment in June 2025 (Reiwa 7). On December 10 of the same year, they published a groundbreaking report (hereinafter referred to as “the Report”) that redefines crypto assets comprehensively as “financial instruments.”
The Report is poised to significantly reshape the landscape of the crypto assets business. This article will explain the key points of the Report and its implications for practical operations.
From “Payment” to “Investment”—The Changing Role of Crypto assets in Japan
Japan’s crypto assets regulations took a pioneering step in 2016 with the amendment of the “Payment Services Act” (hereinafter referred to as the “Payment Services Act”), introducing a registration system and a framework for user protection. Since then, further legal amendments have been made to address issues such as frequent unauthorized outflows and anti-money laundering (AML) measures.
However, an overview of the current situation reveals a significant shift in the phase surrounding crypto assets. The number of accounts opened with domestic crypto assets exchanges has exceeded 13 million, and the balance of deposits has reached 5 trillion yen (as of the time of writing). Notably, the motivation of users is significant; according to a survey, approximately 87% of holders aim for “investment” with the expectation of long-term value appreciation. The listing of Bitcoin ETFs in the United States and the entry of institutional investors are also accelerating this trend towards investment.
On the other hand, challenges in user protection are becoming more severe. The Financial Services Agency’s consultation desk receives over 350 complaints per month, many of which are related to fraudulent investment solicitations. Additionally, cyberattacks leading to asset outflows continue, with attackers becoming more sophisticated and organized, often aiming to secure funds for terrorism.
Previously, the Payment Services Act regarded crypto assets as a “means of payment,” but the gap with the investment reality has become pronounced. Considering international regulatory trends, such as the International Organization of Securities Commissions (IOSCO) recommendations to curb unfair trading and Europe’s MiCA (Markets in Crypto-Assets Regulation), it has become an urgent task to establish comprehensive regulations from the perspective of investor protection, treating crypto assets as “financial products.”
Four Pillars of the “Working Group on the Crypto assets System” Report in Japan
The core transformation proposed in this report is to elevate the legal status of crypto assets from “means of payment” to “financial instruments” under Japanese law. This shift makes the transition from regulation under the traditional Payment Services Act to the more stringent Financial Instruments and Exchange Act (FIEA) increasingly feasible.
Specifically, to enhance market transparency and create an environment where investors can trade with confidence, the report recommends the following four key items. These will serve as the “new fundamental rules” for future crypto assets business in Japan.
Fundamental Review of the Underlying Legal Framework
The key point of this report is the recommendation to shift the regulatory foundation for crypto assets from the current Payment Services Act to the “Financial Instruments and Exchange Act” (hereinafter referred to as “FIEA”) in Japan.
The FIEA is designed with the principle of providing comprehensive protection for highly investment-oriented financial products. It has been determined that the nature of crypto assets transactions, which involve expectations of returns due to price fluctuations, aligns closely with the regulatory framework of the FIEA. However, since crypto assets do not represent legal rights such as profit distribution, they are to be positioned as a new type of “financial instrument” distinct from “securities” under the FIEA.
Ensuring Comprehensive Disclosure for Investor Protection in Japan
Cryptographic assets possess a high level of technical expertise, leading to significant information asymmetry between issuers or experts and general users. To address this issue, regulations have been proposed to mandate new sales and continuous disclosure, ensuring accuracy and accountability.
When issuers of cryptographic assets conduct fundraising, they are required to provide information on the nature, functionality, underlying technology, risks, and the use of raised funds. Additionally, it is recommended that they provide timely disclosure of events that significantly impact trading decisions after sales, as well as periodic information disclosure approximately once a year.
For false statements in disclosure content, criminal penalties, civil liabilities, and a surcharge system similar to the securities registration statement under the Japanese Financial Instruments and Exchange Act are being considered. Furthermore, if issuers do not have financial audits conducted by an auditing firm, measures have been included to set investment limits for users to prevent hasty and excessive transactions.
Strengthening Regulations for Crypto assets Exchange Operators in Japan
Under Japanese law, crypto assets exchange operators are set to be subjected to stringent regulations equivalent to the “Type I Financial Instruments Business” under the Financial Instruments and Exchange Act. Specifically, these regulations will focus on enhancing operational management systems, customer protection, and security measures.
In terms of operational management systems and customer protection, it is anticipated that operators will be required to ensure “customer suitability,” which involves verifying that customers are trading within their risk-bearing capacity, in addition to establishing a robust review system for the crypto assets they handle.
Comprehensive security measures, including those covering the entire supply chain, will be newly established as a legal obligation. Furthermore, since the risk of hacking cannot be entirely eliminated even when managing assets in cold wallets, operators will be required to accumulate reserve funds as a source of compensation in the event of unauthorized outflows.
Introduction of Unfair Trading Regulations (Insider Trading Regulations) in Japan
Until now, there have been no direct insider trading regulations for crypto assets in Japan. However, to ensure market fairness, a new regulation based on the framework of the Japanese Financial Instruments and Exchange Act will be established.
This regulation targets crypto assets handled by domestic exchange operators, including those under application for handling. It prohibits internal stakeholders, such as executives, from trading based on undisclosed material information. Material information is expected to include events such as the issuer’s bankruptcy, significant security risks, new listings or delistings, and large transactions (such as those involving 20% or more of issued assets).
To ensure the effectiveness of these regulations, it has been proposed to grant the Securities and Exchange Surveillance Commission investigative authority and to introduce a penalty system for unfair trading.
Required Actions for Companies in Japan
The transition of the foundational law is not merely a change in name. It necessitates a comprehensive review of compliance systems, additional financial costs, and stricter information management in human resources, among other significant management decisions. Below, we outline the key actions required for companies in Japan based on their positions.
Actions Required for Crypto assets Exchange and Brokerage Firms in Japan
Businesses currently registered under the Japanese Payment Services Act must urgently prepare for the transition to the First Financial Instruments Business under the Financial Instruments and Exchange Act.
Firstly, in reconstructing internal controls and compliance, adapting to more advanced conduct regulations such as advertising restrictions, disclosure obligations, and the formulation of best execution policies is necessary. Additionally, with the introduction of insider trading regulations, it becomes crucial to manage employees’ proprietary trading and establish information barriers (Chinese walls) to separate issuer-related information.
The report also emphasizes the supervisory responsibility over the entire supply chain, including wallet software providers. Therefore, it is required to develop business plans that incorporate increased financial and technical costs, such as thorough management of subcontractors and securing contingency reserves for cyberattack incidents.
Actions Required for Companies Considering Issuing Crypto assets (IEO, etc.) in Japan
Companies issuing crypto assets for fundraising (IEO, etc.) will bear disclosure responsibilities akin to those of publicly listed companies, including establishing financial audit systems and managing insider information.
To avoid investment cap regulations and ensure user trust, it is recommended to establish a system for financial audits by auditing firms. Additionally, it will become essential to accept code audits by highly specialized third parties to verify that there is no discrepancy between the content described in the white paper and the actual code.
Furthermore, since significant facts related to the company’s operations are subject to insider trading regulations, it is imperative to establish information management rules for executives, employees, and primary information recipients (such as partners).
Prospects for Crypto assets Business in Japanese Financial Institutions
For banks and insurance companies, while careful consideration is still required for direct trading, there is a trend towards allowing crypto assets exchange businesses through subsidiaries and holding for investment purposes, provided there is a sufficient management system. This creates opportunities for financial group companies to strategically consider offering diversified investment options to customers and entering the custody business. However, entry into this field requires the establishment of strict solicitation rules based on the suitability principle under the Financial Instruments and Exchange Act.
Conclusion: Monitoring Future Trends in Japanese Legal Revisions
This report serves as a guideline for future legal revisions in Japan. However, it is anticipated that many specific requirements will be defined through Cabinet Office ordinances and self-regulatory rules. Areas such as the regulation of decentralized exchanges (DEX) and the establishment of emergency injunction authority against unregistered operators are expected to undergo continuous review. It is crucial not only to comply with statutory provisions but also to consistently monitor the supervisory guidelines of authorities and the trends of self-regulatory organizations, providing management with appropriate risk assessments.
While this report itself does not possess legal binding power, it offers significant insights into the direction of future legal revisions in Japan. Therefore, it is necessary to consider responses with the expectation that the contents of this report may be legislated.
Guidance on Measures by Our Firm
Monolith Law Office possesses specialized expertise in both IT and legal fields, providing comprehensive support for businesses related to crypto assets, NFTs, and blockchain. Our services range from assisting with the registration of crypto assets exchange businesses to facilitating fundraising through IEOs and establishing governance structures to prevent insider trading. Detailed information is provided in the article linked below.
Category: IT
