- Japan’s FSA plans to require cryptocurrency exchanges to hold liability reserves to protect users from hacks and system failures.
- High-profile breaches at exchanges including DMM Bitcoin and Bybit underscore the urgent need for stronger safeguards.
- Proposed reforms also include potential crypto reclassification, stablecoin pilot programs, and increased bank involvement to enhance market security.
The Financial Services Agency (FSA) of Japan is advancing plans to require cryptocurrency exchanges to hold reserves to cover potential losses, protecting users from hacks and technical failures. Currently, Japanese exchanges can keep customer funds in offline cold wallets, which avoids reserve obligations, but the new rules would eliminate this exemption. Legislation is expected to be presented to parliament in 2026.
The framework for these liability reserves is modelled on traditional securities firms, which hold between US$12.7 million (AU$19.6 million) and US$255 million (AU$392 million) depending on trading activity. Exchanges may be permitted to purchase insurance instead of holding full cash reserves, helping to offset operational costs. The law would also establish procedures for returning customer assets if an exchange collapses, allowing administrators to intervene.
The impetus for the regulation stems from several recent security incidents. DMM Bitcoin lost 4,502 BTC, worth approximately US$305 million (AU$469 million), to North Korean hackers in 2024. In February 2025, Bybit suffered a breach with losses totalling US$1.46 billion (AU$2.25 billion). Smaller incidents, such as US$21 million (AU$32.29 million) stolen from SBI Crypto in 2025, underscore ongoing vulnerabilities. The FSA intends these reserves to ensure that user losses are fully compensated.
Related: Japan Moves to Regulate Crypto as Financial Products in Major FSA Overhaul
Japan Explores Wider Crypto Regulations
Alongside liability reserves, Japan is exploring broader regulatory changes. Certain crypto assets may be reclassified as financial instruments under the Financial Instruments and Exchange Act, potentially subjecting them to rules on insider trading and investor protection. Banks may also play a larger role, with stablecoin pilots already underway at MUFG, Sumitomo Mitsui, and Mizuho to test legal compliance and operational feasibility.
Industry experts suggest that these measures could restore confidence in exchanges, functioning much like traditional bank insurance, although they may increase operational costs. Overall, Japan aims to balance enhanced security for users with a regulatory environment that supports further crypto adoption.
Related: South Africa Flags Crypto and Stablecoin Gaps as Emerging Threat to Financial Stability
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