Japan overhauls crypto oversight as market grows to $2.66 trillion

Japan is making a decisive regulatory shift to better align with the global rise in cryptocurrency markets, moving oversight of digital assets from the Payment Services Act to the Financial Instruments and Exchange Act.

The change, spearheaded by the Financial Services Agency (FSA), reflects the country’s evolving approach to treating crypto as an investment product rather than a mere payment instrument.

It comes as Japan’s crypto trading volumes are projected to double from $66.6 billion in 2022 to $133 billion, even as domestic influence lags behind global trends in decentralised finance and tokenised asset markets.

FSA convenes working group to shape legislative changes

On 31 July, the FSA held the first meeting of its Crypto Assets Working Group, launching a structured review to reclassify digital tokens.

The group, made up of academics, industry leaders, and tax experts, discussed enhancing legal protections for investors and tailoring oversight to reflect the rapid shift in market behaviour and digital asset usage.

The group acknowledged that the global crypto market had ballooned from $872 billion to $2.66 trillion, highlighting the urgency for more robust investor safeguards and scalable legal systems.

Japan, meanwhile, holds 12.1 million crypto accounts valued at $33 billion, indicating substantial domestic engagement despite concerns over international competitiveness and innovation gaps.

New classification to separate fundraising tokens from established assets

Under the proposed reforms, Japan aims to create a two-tier system for crypto asset regulation.

Fundraising tokens, such as those issued through ICOs or token sales, would face strict disclosure requirements from issuers.

In contrast, established cryptocurrencies like Bitcoin would remain under exchange-regulated regimes designed to maintain stability, transparency, and risk monitoring.

Yuichiro Matsui from the University of Tokyo emphasised the need for modernised frameworks, while Georgetown University’s Shinichiro Matsuo stressed that any future regulation must address security, adaptability, and cross-border cooperation in the evolving Web3 economy.

The FSA also intends to address transparency and fraud prevention, with future plans potentially including laws against insider trading within the crypto sector.

Draft proposals are expected before the end of 2025, with legislative changes likely by early 2026 to enforce regulatory clarity.

Crypto tax policy under scrutiny as fraud risks persist

Taxation was another key focus of the meeting. Yuichi Murakami, a tax expert, warned against treating crypto wallets as separate entities for taxation.

Responding to industry demands for Web3-friendly tax rules, Murakami pointed out that current systems lack the tools to handle fragmented wallet data, and that separate taxation could open the door to fraud, misreporting, and tax evasion.

Murakami shared his concerns on X, formerly Twitter, stating that any effort to create wallet-specific tax breaks must be preceded by clear standards and investor protections.

The working group’s upcoming proposals are expected to address these gaps by introducing uniform standards that can both support market innovation and close existing regulatory loopholes.

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