Japan Requires Crypto Platforms to Hold "Insurance" Reserves to Protect Investors from Potential Failures

Japan Introduces New Crypto Regulations With Liability Reserve Requirement

The Financial Services Agency (FSA) of Japan plans to introduce a groundbreaking rule that will require licensed cryptocurrency exchanges to set aside liability reserves. This initiative is designed to protect investors from potential losses caused by hacks, fraud, or operational mishaps. The proposal is expected to be presented to parliament during the 2026 regular session,

based on their transaction volumes and past incident history. to fulfill part of the cash reserve obligations, which may help smaller exchanges meet the requirements.

This regulatory overhaul is a response to two major incidents: the 2014 collapse of Mt. Gox, which lost 850,000 BTC, and

in May 2024, where a flaw in third-party wallet software was exploited. Regulators aim to prevent situations where exchanges are unable to reimburse users without outside intervention . The FSA’s working group is currently developing calculation methods and enforcement strategies, building on current cold-storage requirements and .

The liability reserve framework is modeled after protections in traditional finance, where Japanese securities companies are required to hold reserves between ¥2 billion and ¥40 billion ($12.7 million to $255 million), depending on their size

. For crypto exchanges, reserve amounts will be determined by risk assessment, with - which already maintain voluntary reserves - likely to adapt more easily. Smaller operators may turn to insurance, an option the FSA is considering to ease liquidity demands .

The 2026 legislative package will also redefine cryptocurrencies under the Financial Instruments and Exchange Act,

, tighter custody checks, and more robust disclosure requirements. This move brings Japan’s crypto regulations in line with those for conventional securities, a jurisdiction that balances regulation with support for innovation.

On the global stage, Japan’s regulatory stance is similar to the European Union’s MiCA rules and Hong Kong’s insurance-based compensation systems

. Within Japan, six leading asset managers are already preparing to launch crypto investment trusts to keep pace with the evolving regulatory environment .

Some critics argue that the increased compliance costs could be difficult for smaller exchanges, while supporters believe these measures will help rebuild user trust. “Liability reserves act as a safety net similar to bank account insurance,” said Musheer Ahmed, founder of Finstep Asia, though he noted that the capital requirements “will make running a crypto exchange comparatively more costly”

.

The FSA’s wider plan also includes

and trading partners, requiring them to register with authorities. This follows the DMM breach, which .

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