Japan’s financial landscape underwent a transformative shift on May 1, 2020, with the enforcement of major amendments to the Payment Services Act (PSA) and the Financial Instruments and Exchange Act (FIEA). These changes reflect a strategic move by the Financial Services Agency (FSA) to strengthen investor protection, tighten oversight of crypto-related services, and bring clarity to previously unregulated areas such as crypto custody and derivatives trading.
Designed to foster a safer and more transparent digital asset ecosystem, the revised laws now impose stricter compliance requirements on crypto exchanges, custodians, and derivative providers—marking a pivotal moment in Japan’s journey toward becoming a global leader in regulated blockchain innovation.
👉 Discover how Japan’s new crypto rules are shaping secure digital investments
Pre-Amendment Regulatory Landscape: A Gray Zone
Before the 2020 amendments, Japan had established itself as one of the first countries to regulate cryptocurrency exchanges under the Payment Services Act. Any entity offering virtual currency exchange services was required to register with the FSA as a Virtual Currency Exchange Service Provider (VCESP).
To qualify for registration, applicants needed to be either:
- A Japanese kabushiki kaisha (joint-stock company), or
- A foreign entity with equivalent licensing in its home jurisdiction and a registered branch in Japan.
Additionally, firms were expected to maintain sufficient organizational capacity to operate “properly and securely,” though no clear benchmarks existed for this requirement. Guidance emerged indirectly through an 86-page questionnaire issued by the FSA in October 2017, which outlined expectations around governance and operational integrity.
Key obligations included:
- Segregation of customer assets from corporate funds
- Regular audits by certified public accountants (CPAs)
- Compliance with anti-money laundering (AML) and know-your-customer (KYC) standards under the Act on Prevention of Transfer of Criminal Proceeds
- Maintenance of accurate financial records and dispute resolution mechanisms
Despite these measures, significant gaps remained—especially regarding crypto custody services not tied to trading, margin and derivatives trading, and initial coin offerings (ICOs). There were no specific rules governing cash-settled crypto derivatives or standalone custodial platforms, creating regulatory blind spots that left investors vulnerable.
Key Changes Introduced by the 2020 Amendments
The 2020 revisions addressed these gaps through two major legislative updates: enhancements to the Payment Services Act (PSA) and expansions within the Financial Instruments and Exchange Act (FIEA).
1. Expansion of PSA: Defining "Crypto Asset Exchange Service Providers"
The most notable change under the PSA was the redefinition of regulated entities to include crypto asset custody providers, even if they don’t facilitate buying or selling.
Who Now Falls Under Regulation?
Any individual or firm that:
- Buys or sells crypto assets
- Acts as an intermediary in crypto transactions
- Provides custodial services where they hold private keys or can initiate transfers without customer consent
This means standalone custodians must now register with the FSA unless they lack full control over private key fragments in multi-signature setups.
Additional Registration Requirements
Entities applying for registration must now disclose shareholders holding 10% or more voting rights. Furthermore, if a provider holds customer assets, its net assets must exceed the total value of crypto held in hot wallets—a stricter standard beyond the existing ¥10 million minimum capital requirement.
2. Client Asset Protection: Stricter Safeguards
To prevent losses like those seen in past exchange hacks, the amendments introduced robust protections for both fiat and digital assets.
Trust Accounts for Fiat Deposits
All client cash must be:
- Held separately in trust accounts managed by licensed trustees
- Designated with clients as beneficiaries
- Monitored daily; any shortfall must be corrected within two business days
Trustees must appoint at least one professional agent (e.g., lawyer, CPA) to oversee the trust. Assets may only be invested in low-risk instruments.
Cold Storage Mandate for Crypto Holdings
Customer crypto assets must be stored in cold wallets or equivalent offline systems, except for up to 5% used for operational liquidity. Even this portion must be isolated and backed by an equal amount of the exchange’s own assets held securely—ensuring customer priority in insolvency scenarios.
The FSA defines “cold wallet equivalents” as systems using non-internet-connected media with equivalent security measures.
Annual Audits & Emergency Preparedness
Registered providers must undergo annual audits by CPAs to verify compliance with asset segregation rules. They must also establish emergency response plans for service disruptions or asset recovery failures.
3. Best Execution and Conflict Management
Exchanges must now implement policies ensuring best execution of client orders—mirroring standards applied to securities brokers. This includes:
- Publishing order execution quality metrics
- Disclosing when acting as counterparty in trades
- Establishing systems to detect conflicts of interest
- Preventing market manipulation and fraudulent activity
They must also manage material non-public information and avoid excessive leverage in lending activities.
4. Margin Trading and Leverage Restrictions
Margin trading is now subject to strict rules similar to forex trading:
- Clear disclosure of risks and terms
- Mandatory collateral deposits (minimum 50% of position value)
- Automatic loss-cutting mechanisms to limit exposure
These provisions aim to curb speculative excesses and protect retail investors from sudden liquidations.
5. Advertising and Marketing Limits
Marketing practices are now tightly controlled:
- Ads cannot promote crypto solely as a vehicle for capital gains
- Must clearly state that crypto is not legal tender
Required disclosures include:
- Risk of price volatility
- Limited acceptance as payment
- Company registration status
All ads must comply with Cabinet Office guidelines to ensure transparency and responsible messaging.
6. Stablecoins and Fund Managers: Regulatory Ambiguity Remains
While the amendments cover many areas, some questions remain unresolved:
- The FSA has not confirmed whether stablecoins qualify as crypto assets under the PSA
- Fund managers investing in crypto may need to register as exchange providers if they trade on behalf of clients—but this depends on structure and activity level
👉 See how compliant platforms are adapting to Japan’s evolving crypto rules
FIEA Amendments: Bringing Derivatives Under Oversight
The Financial Instruments and Exchange Act was updated to classify crypto-related derivatives as financial instruments, bringing them under full regulatory scrutiny.
1. Crypto Derivatives = Regulated Financial Products
Any business offering crypto futures, options, or swaps—whether settled in cash or crypto—must now register as a Type I Financial Instruments Business Operator.
This applies even if the provider already holds a PSA license. Dual registration may be required for firms offering both spot trading and derivatives.
2. Security Tokens Recognized as Securities
Blockchain-based investment contracts, such as tokenized partnership shares where holders participate in profits/losses, are now treated as securities. Trading these tokens constitutes Type I financial business unless restricted to accredited investors—placing them under stricter oversight than general partnership interests.
Operating a market for such tokens requires a securities exchange license, with enhanced reporting and governance demands.
3. Criminal Penalties for Market Abuse
The FIEA now explicitly prohibits:
- Fraudulent trading
- Market manipulation
- Misleading statements about crypto products
Violations can lead to criminal prosecution, reinforcing deterrence against unethical behavior.
Industry Impact and Self-Regulation
With 23 FSA-approved exchanges at the time of reform, Japan’s market responded swiftly:
- Platforms like BitMEX exited the Japanese market before May 1, 2020
- The FSA recognized two self-regulatory organizations: JVCEA (Japan Virtual & Crypto Assets Exchange Association) and STO Association Japan
These bodies collaborate with regulators to enforce industry standards, conduct peer reviews, and promote ethical conduct.
Frequently Asked Questions (FAQ)
Q: Do all crypto custody providers need FSA registration?
A: Only those who hold full control over private keys or can transfer assets without user consent. Providers using fragmented key systems (e.g., multi-sig) without full access may be exempt.
Q: Are stablecoins regulated under the new laws?
A: Not explicitly. The FSA has not yet clarified their classification, leaving regulatory treatment uncertain.
Q: Can foreign exchanges serve Japanese users after the amendments?
A: Only if they comply with FSA registration or partner with a licensed local entity. Most unlicensed platforms have blocked Japanese IP addresses.
Q: What happens if a registered exchange goes bankrupt?
A: Customer cash in trust accounts is protected and transferred to designated agents. Crypto assets in cold storage are prioritized over general creditors.
Q: Is margin trading still allowed?
A: Yes, but under strict rules—including minimum 50% collateral and automatic loss-cutting protocols.
Q: How do the FIEA changes affect ICOs?
A: Token projects involving derivatives or profit-sharing mechanisms may now fall under securities law, requiring proper disclosures or exemptions.
👉 Stay ahead of global crypto regulations with real-time updates
The 2020 amendments represent a comprehensive effort by Japan to balance innovation with investor safety. By expanding oversight to custody and derivatives, enforcing best practices, and empowering self-regulatory bodies, Japan has set a benchmark for responsible digital asset regulation—one that continues to influence policy worldwide.
As global regulators look to Japan’s model, understanding these reforms is essential for investors, entrepreneurs, and compliance officers navigating the future of finance.