Japan is at the forefront of nations prioritizing cryptocurrency security and financial stability. Its financial services regulator, the Financial Services Agency (FSA), is considering a new and stringent regulation to strengthen oversight of third-party service providers that work with Crypto Exchanges. This rule would mandate that firms offering crypto custody and trade management services must be registered with the government, and exchanges must use services only from these registered providers.
This action is a direct reaction following major security breaches in the crypto sector, including the DMM Bitcoin hacking incident in 2024. This amendment demonstrates Japan’s commitment to securing digital assets and closing the Security Loopholes in the operations of crypto exchanges.
Need for the New Rule: The DMM Hack and Third-Party Risks
Current Japanese regulations demand that crypto exchanges store customer assets in secure “Cold Wallets” and maintain robust internal administration. However, these regulations do not extend to third-party software and service providers used by exchanges for their operations and trade management.
The DMM Bitcoin Hacking as a Warning
The DMM Bitcoin hacking incident in 2024 serves as a prime example of how this loophole can be exploited. In this incident, where approximately 48.2 billion yen ($312 million) worth of Bitcoin was stolen, it was identified that hackers gained entry through Ginco, a Tokyo-based software firm used by DMM for its trading management.
This incident highlighted that even if an exchange ensures its own security, the weakness of its external service provider can pose a risk to the entire system. As reported by Nikkei, the FSA believes that closing this loophole will help prevent thefts, system failures, and fraud.
FSA’s Deliberation and Timeline
The discussions were held on November 7 by a working group under the Financial System Council, an advisory panel to the Japanese Prime Minister. A majority of the working group members supported the proposed framework. Based on these deliberations, the FSA plans to compile a report soon and aims to submit the necessary amendments to the Financial Instruments and Exchange Act during the Ordinary Diet Session in 2026.
Impact and Challenges Posed by the New Rule
If this new rule comes into effect, it will transform the entire ecosystem of custody and trading services in the Japanese crypto market.
Cost and Compliance Burden for Exchanges
Since crypto exchanges will now only be able to use registered custodians, this could increase their operational costs. Many exchanges currently use or Outsource to a variety of software and service providers; they will have to switch only to firms that meet the registration requirements. Consequently, Compliance Costs will rise. While smaller exchanges may struggle with this burden, in the long term, it will enhance Trust by protecting user assets.
Approach of International Crypto Firms
Many large crypto custody providers in the U.S. and Europe will be required to register with the FSA to continue offering their services in Japan. Japan’s crypto regulations are already stringent. This added registration requirement could become an additional barrier for foreign service providers entering the Japanese market. However, for firms compliant with the rules, it will also be an opportunity to solidify their dominance in the Japanese market.
FSA’s Broader Regulatory Perspective
In addition to focusing on crypto custody, the Japanese FSA is undertaking other key initiatives to enhance the digital asset ecosystem.
Momentum in Stablecoin Projects
Recently, the FSA has been actively promoting local Stablecoin projects. This has the dual purpose of fostering innovation in the country’s financial sector and digitizing payments. Last month, the FSA approved the country’s first yen-pegged stablecoin, JPYC, which is a significant step forward.
Furthermore, the FSA announced last week its support for a stablecoin pilot project involving Japan’s three largest banks: Mizuho Bank, MUFG, and SMBC. This shows that Japan is taking a selective and controlled approach to embracing crypto innovation.
A Move Towards Security and Clarity
The FSA’s initiative to limit crypto custody services to registered providers demonstrates its intent to bring greater Clarity and Security to its digital asset regulations. Learning from incidents like the DMM hacking, regulating the external dependencies of crypto exchanges is crucial. The upcoming amendments to the Financial Instruments and Exchange Act in 2026 are expected to move Japan one step further up the ladder of global crypto security standards.
This move will strengthen consumer confidence in the Japanese crypto market and provide a more secure platform for regulated institutional investors to enter the digital asset space.
