Japan's Financial Services Agency (FSA) proposes regulating cryptocurrencies under the Financial Instruments and Exchange Act (FIEA), potentially increasing compliance costs and impacting market access.

Executive Summary

Japan's Financial Services Agency (FSA) has proposed regulating cryptocurrencies under the Financial Instruments and Exchange Act (FIEA), signaling a stricter regulatory approach. The proposal aims to enhance investor protection and address issues like unclear information disclosure. This move could significantly impact crypto businesses operating in Japan.

The Event in Detail

The FSA's report recommends regulating cryptocurrencies under the FIEA, shifting them from the current classification under the Payment Services Act. This proposal, presented on Tuesday and slated for review by the Financial System Council on June 25, aims to align crypto oversight with securities regulation. The FSA highlights that many issues within crypto, such as unclear white papers and investment scams, resemble those traditionally addressed under the FIEA.

Market Implications

If implemented, the new regulations would impose stricter information disclosure requirements on cryptocurrency issuers and intermediaries. This could lead to increased compliance costs for crypto businesses and potentially impact market access. The report indicates that Japan has over 12 million cryptocurrency accounts with total user deposits of 5 trillion yen (approximately $33.7 billion USD). However, small-scale trading is dominant, with over 80% of individual accounts holding less than $675, according to the FSA.

Expert Commentary

“So it may be appropriate to address them (crypto assets) using the mechanisms and enforcement of the Financial Instruments and Exchange Act.”

Broader Context

The FSA's proposal aligns with international regulatory trends focused on strengthening information disclosure and user protection in the crypto market. The U.S., for example, has also seen increased regulatory activity, with the passage of the GENIUS Act in July, which regulates payment stablecoins. The FSA's move could set a precedent for other jurisdictions considering stricter crypto regulations. The proposal awaits final decisions from the Financial System Council and the government, with potential submission to the Japanese parliament as early as 2026. Increased regulatory scrutiny and reporting could result in higher operational costs for exchanges and issuers. Under the prospective 'financial products' status, cryptocurrencies would fall under existing capital market rules, including prohibitions against insider trading.