Japan’s Financial Watchdog Tightens Crypto Custody Rules – Will This End the Wild West Era?

Tokyo cracks down as regulators target loopholes in digital asset safekeeping. The Financial Services Agency's latest move signals growing impatience with crypto's regulatory gray zones.

Behind the scenes: Custody providers now face stricter segregation requirements for client funds. No more commingling assets like it's 2017 all over again.

The irony? These 'new' safeguards mirror traditional finance rules that crypto was supposed to disrupt. Some decentralization.

Focus on security after major breach

The renewed focus on security comes in the wake of the 2024 breach of DMM Bitcoin, in which hackers siphoned off about 48.2 billion yen, or $312 million, in bitcoin. The source of the intrusion was identified as Tokyo-based software provider Ginco, which handled much of DMM’s trading systems.

Following the incident, Japan enacted new crypto laws that better protect users. The rules demanded that exchanges store customer assets in the country, boost anti-money laundering checks, and permit uses such as making crypto available for in-app payments.

Last year, Japan’s Financial Services Agency (FSA) warned five offshore crypto exchanges, Bybit, KuCoin, MEXC Global, Bitget, and Bitcastle, for operating without registration.

Japan’s innovation push

Along with its push for stronger security, Japan is also encouraging innovation in digital finance. The FSA has greenlit a new pilot program to test yen-backed stablecoins with three of the country’s largest banks: Mitsubishi UFJ (MUFG), Sumitomo Mitsui (SMBC), and Mizuho.

The project, which was launched under the FSA’s Payment Innovation Project (PIP), is aimed at exploring ways stablecoins can make payments quicker and cheaper for businesses and consumers. 

The agency also intends to revise the Financial Instruments and Exchange Act in order to bring cryptocurrencies under insider trading laws, like the rest of the world.