Japan’s Innovative Crypto Regulatory Framework

Japan boasts one of the world’s most advanced regulatory regimes for cryptocurrencies, a testament to its proactive stance in addressing the challenges and opportunities presented by digital assets long before Europe’s Markets in Crypto-Assets (MiCA) framework was established. The core of Japan’s regulatory approach is encapsulated in the Payment Services Act (PSA), revised in 2017, which introduced a robust licensing system for crypto exchanges, referred to as Crypto-Asset Exchange Service Providers (CAESPs). This article delves into Japan’s intricate and well-structured regulatory environment, which could serve as a model for other nations.

Licensing and Regulatory Oversight

Under the PSA, all crypto exchanges in Japan are required to register with the Financial Services Agency (FSA). Compliance with strict conduct rules, including the segregation of customer funds and the requirement for audited accounts, is mandatory. This not only enhances transparency but also aims to build trust in digital currencies among users. Tokio Morita of FinCity.Tokyo remarks that Japan was "the first jurisdiction to formally regulate crypto-asset transactions," laying the groundwork for frameworks like MiCA in Europe.

Multi-Layered Classification of Digital Assets

Japan’s regulatory framework stands out due to its nuanced classification of different types of digital assets, which are governed by existing laws rather than a single unified code like MiCA.

1. Cryptoassets Under the PSA

Bitcoin, Ether, and similar tokens are classified as cryptoassets under the PSA. Operators of these exchanges must hold a license as CAESPs issued by the FSA. Regulatory mandates specify that custodial wallets must maintain a significant amount of user funds in offline wallets—typically over 95%—with all user assets subject to annual audits. Furthermore, anti-money laundering (AML) regulations and comprehensive Know Your Customer (KYC) practices are strictly enforced.

2. Security Tokens Under the FIEA

Tokens that represent securities—such as shares or other investment fund interests—are governed by the Financial Instruments and Exchange Act (FIEA), categorized as security tokens. To handle or sell these tokens, stakeholders must obtain a Type I financial instruments license. Japan additionally has provisions for tokenized securities through the Act on Electronic Transferable Rights, although this framework has seen limited application.

3. Stablecoins: A New Era

Japan took a significant leap in June 2022 when its Parliament passed an amendment defining fiat-pegged tokens as electronic payment instruments (EPI), effectively recognizing them as digital money. With regulations enforced from June 1, 2023, only banks, licensed money-transfer agents, and trust companies are permitted to issue stablecoins, which must be fully backed by currency reserves and stored under segregated custody. Notably, algorithmic or crypto-backed stablecoins retain their classification as cryptoassets.

In 2025, Japan’s first regulated yen stablecoin (JPYC) was approved, marking a milestone in the country’s stablecoin evolution.

Key Legislative Milestones

Japan has seen pivotal developments in its digital asset regulations since 2017:

• April 2017: The revised PSA introduces licensing for crypto exchanges.
• May 2020: Enhanced user protection rules, including stricter AML regulations, come into effect.
• June 2022: The Stablecoins Amendment Act is passed, establishing frameworks for fiat-pegged coins.
• June 2023: Regulatory rules on stablecoins are enforced, emphasizing full reserves and custodial safeguards.
• 2025: Proposed new licenses for crypto asset intermediaries are discussed, potentially shifting many crypto regulations under securities laws.

Retail Investor Protection and Institutional Growth

Japan’s multi-faceted regulatory regime adequately addresses the needs of retail and institutional investors. Retail users face stringent oversight, including stringent FSA registration for platforms servicing Japanese customers and robust protections for user funds. In a recent shift, the FSA announced its intention to classify user crypto holdings more as investment products rather than mere payment tokens, impacting how cryptocurrencies are treated in financial markets.

Simultaneously, institutional frameworks are being bolstered. Stablecoins are recognized as viable payment options under rigorous issuance regulations, with major banks such as MUFG and SMBC collaborating on initiatives to pilot fiat stablecoins for corporate transactions. Furthermore, tokenization of assets like bonds and real estate is gaining traction, supported by evolving market perceptions of crypto as an investment vehicle.

Tokyo: A Nexus for Fintech and Web3 Initiatives

Tokyo’s government actively fosters a conducive environment for fintech and Web3 innovations. Initiatives like FinCity.Tokyo, backed by the Tokyo Metropolitan Government, aim to attract foreign firms and startups in the Web3 space. By connecting the right stakeholders and offering a one-stop service for licensing assistance, FinCity helps firms navigate the local regulatory landscape seamlessly.

Programs like Invest Tokyo and new government-backed initiatives, including the FinTech Proof-of-Concept Hub, showcase Japan’s dedication to nurturing a progressive regulatory framework for blockchain and digital assets. Governor Yuriko Koike’s broader GovTechTokyo agenda further signals a commitment to innovation beyond just crypto.

Regulatory Thought Leadership

Ongoing refinement of regulations remains a priority for Japan’s regulators. The FSA aims to maintain comprehensive oversight of crypto assets, stablecoins, and tokenized securities. Chief FinTech lead Ryosuke Ushida emphasizes that Japan already possesses a robust regulatory framework, which is continuously updated to align with global benchmarks and market developments.

This evolution in regulatory philosophy signifies a shift towards viewing crypto transactions similarly to securities offerings, which may lead to tighter market rules and enhanced disclosures in the future.

Japan’s Role as a Leading Crypto Jurisdiction

In essence, Japan’s regulatory framework does not consist of a single overarching law but, rather, is an intricate synthesis of various regulations managed by the FSA. This structured approach balances user protection for retail investors while enabling institutional participants through a robust legal structure for tokenization and stablecoins.

Tokyo’s local government initiatives bolster this regulatory framework, establishing Japan as a globally influential player. As Morita notes, Tokyo offers ample opportunities for ventures engaged with digital assets and Web3, making it an attractive hub for innovation in these sectors.

Author: Ayanfe Fakunle