Japan was one of the first countries in the world to legally define and regulate crypto

Japan is gearing up for a major crypto regulatory reset. The Financial Services Agency (FSA) is deliberating on a legal amendment that could reclassify crypto from a payment tool to a “financial product” in order to boost investor protection amid crypto accounts quadrupling over five years.

On November 26, the FSA working group reviewing crypto regulation convened for the sixth time to discuss persistent consumer complaints, a rise in overseas fraud schemes, and the growing threat of sophisticated cyber attacks. According to discussions, there are approximately 350 crypto-related consumer complaints on average each month.

The shift from the Payment Services Act (PSA) to the Financial Instruments and Exchange Act (FIEA) would trigger rigorous disclosure rules, insider trading protections, and criminal penalties for crypto businesses.

Crypto tax relief

The working group also suggests introducing a flat 20% tax on crypto gains, bringing them in line with stock trading. Crypto profits are currently treated as miscellaneous income and taxed at 15% to 55%, depending on a taxpayer’s income bracket.

Tatsuo Oku from the Blockchain Promotion Association (BCCC) said that with the number of crypto accounts growing to 13 million in Japan, he anticipates demand to expand further if tax rules were aligned with financial products.

Rintaro Kawai, CEO of ANAP Holdings, which operates a bitcoin trading desk in Japan, warned that Japan is falling “significantly behind” global Bitcoin adoption and said the country “has no future” without bold tax reforms.

Crypto identity crisis

Professor Yoshikazu Yamaoki from Shinshu University’s faculty of economics and law said the current overhaul reflects growing recognition that the crypto market increasingly resembles a securities ecosystem rather than a payments niche.

“The prices of crypto assets like Ethereum or Bitcoin fluctuate far too much. So they also don’t really function as payment instruments,” he explained. “The people who buy these are aiming for capital gains – basically to buy low and sell high. And when you aim for capital gains, that essentially makes them the same as securities.”

Oku from BCCC said that while a shift into the FIEA regime would strengthen market trust through stricter disclosures, it could also impose severe securities-level compliance burdens and spur mergers among weaker exchanges.

Regulators are also considering a model that classifies tokens based on whether they have an identifiable issuer, such as a company or foundation.

Kawai believes the key problem in Japan’s reclassification debate is the failure to distinguish Bitcoin from all other tokens. Globally, Bitcoin is treated separately because it has no issuer and operates more like a decentralized asset class, while tokens such as Ethereum or XRP have identifiable development entities.

“If Japan does not adopt this distinction, he said, the regulatory framework will tilt toward traditional financial institutions, banks, and brokerages that can absorb heavier compliance demands, rather than supporting the broader crypto ecosystem.”

Japan’s patchwork legal approach

The PSA has undergone four major amendments since it came into effect in 2010. The first revision in 2016 created a legal category for virtual currencies following the rise of Bitcoin, while a 2019 overhaul renamed them “crypto assets” and brought investment-type token offerings under securities rules.

A subsequent 2020 amendment reorganized fund transfer services and strengthened user protection, and a 2022 reform established one of the world’s first regulatory frameworks for stablecoins, introducing the concept of “electronic payment instruments.”

Japan can’t keep up with crypto

The FSA’s working group all agree that the crypto market’s rapid expansion has outpaced existing safeguards and is no longer capable of preventing fraud or ensuring market integrity.

Yamaoki said the rules governing crypto have become too fragmented and resemble a “patchwork” of amendments since the collapse of Japan-based Mt. Gox in 2014.

He said whitepapers, the documents that outline how tokens work, are not required to meet any accuracy standards in Japan, which has allowed issuers to make broad claims without legal liability.

He described current technical disclosures as inadequate despite the presence of self-regulation by industry groups such as the Japan Virtual and Crypto Assets Exchange Association (JVCEA). It’s another reason why the government now wants to bring crypto under the country’s securities law.

Crypto self-regulation falls short

Japan’s crypto industry, which is still in its infancy, is struggling to build the same kind of regulatory discipline that governs traditional finance. Yamaoki argues the sector’s main self-regulatory body, JVCEA, which launched in 2018 with 32 staff, is no match for the 373 people who run the Japan Securities Dealers Association (JSDA), which has shaped the industry for five decades.

“Japan’s crypto industry is too young to regulate itself, but policymakers want to model it after the country’s powerful securities watchdog.”

He hopes reclassifying crypto assets from a payment instrument to a security could also designate JVCEA as a self-regulatory body under the more powerful FIEA, which would give it broader disciplinary and investor protection powers.

“We do need to consider the impact on small providers, but it’s also important to ensure transparency and investor protection,” Yamaoki said. “Of course, it will cost small providers a lot, but I think market development is more important.”