- The Japanese regulator, the FSA, plans to submit a proposal at the 2026 ordinary session of the parliament that will require crypto exchanges to maintain liability reserves based on their trading volume.
- Platforms can use funds in the reserve only to compensate customers who have lost funds due to cybersecurity attacks, fraud, operational failures, or unauthorized transactions.
The Financial Services Agency (FSA) is exploring more ways to advance cryptocurrency standards in Japan. Recently, the regulator unveiled a new measure to protect user funds across licensed crypto exchanges in the country.
Liability Reserve Proposal for Crypto Exchanges in Japan
According to Nikkei Asia, the FSA has already finished a proposal that will mandate crypto exchanges to establish liability reserve funds. It will require platforms to set aside funds for immediate payouts to users in the event of hacking incidents, fraudulent activities, operational errors, or unauthorized transactions.
Meanwhile, the regulator will determine the required amount of reserves for each platform based on trading volume and incident history. Alternatively, companies can tap insurance policies to alleviate their cash burden.
An Amendment to the Payment Services Act
The FSA seeks to integrate the new rules as an amendment to the Payment Services Act. Then, it plans to layer the new provisions on top of the law’s cold-storage rules for digital assets.
A Financial System Council working group is currently tasked with fine-tuning the bill. The regulator will include the draft in the agenda of the 2026 ordinary session in the Japanese parliament.
The move follows a series of cybersecurity attacks and fraudulent activities that have occasionally plagued crypto platforms. Japan was a notable venue for some of these high-profile cases. These include the Mt. Gox incident that resulted in a loss of around 850,000 Bitcoin (BTC) in 2014, and the DMM Bitcoin compromised $305 million (¥48.2 billion) worth of user assets.
The new law will serve as an insurance pool. Furthermore, it will ensure that companies can immediately compensate customers without waiting for emergency loans, bankruptcy proceedings, or government bailout. This is no different than the practice employed by brokerages and traditional financial institutions in Japan, which are mandated to hold capital reserves ranging from ¥2 billion ($12.7 million) to ¥4 billion ($25.5 million), depending on their trading volume.
Why It Matters
The FSA’s proposal closes a significant gap in Japan’s crypto regulatory framework. The current cold-storage rules in the Payment Services Act only prevent the commingling of company and user funds and enable offline storage of customer assets. However, there’s no existing legal requirement for crypto exchanges to maintain a dedicated reserve to compensate users for funds lost due to security breaches or operational failures.
