Japan Shifts Crypto Regulation to Securities Rules, Tightens IEO Oversight

The core of Japan’s proposed regulatory overhaul is a transfer of legal authority. Currently, cryptocurrency oversight is grounded in the Payment Services Act (PSA), a framework designed for transactional services. The new plan, outlined by the Financial System Council’s Working Group, calls for moving this oversight to the Financial Instruments and Exchange Act (FIEA). The FIEA is Japan’s primary law governing securities markets, covering issuance, trading, and, critically, disclosure obligations. This reclassification is not merely administrative; it represents a philosophical shift in how Japanese regulators view crypto assets—from a medium of exchange to an investment product subject to rigorous market standards.

The impetus for this change stems from the recognition that the existing payments-focused framework has gaps when applied to the complex, investment-driven nature of much of today’s crypto market. By anchoring regulation in the FIEA, the Financial Services Agency (FSA) seeks to apply a more robust and familiar set of rules designed to ensure transparency, prevent fraud, and promote fair trading practices. This alignment with securities law brings Japan’s approach closer to that of other major financial jurisdictions grappling with similar regulatory challenges.

A direct consequence of this regulatory migration will be significantly tightened rules for initial exchange offerings (IEOs). Under the proposed securities-based framework, IEOs—where crypto exchanges facilitate the sale of new tokens—will be subject to the stringent disclosure requirements of the FIEA. This means projects launching tokens via Japanese platforms will likely need to provide detailed information on their business plans, financial conditions, and risk factors, much like companies conducting a public securities offering. The move is explicitly designed to crack down on fraudulent or misleading projects by mandating greater transparency from the outset.

Furthermore, the shift empowers regulators to intensify their crackdown on unregistered or non-compliant trading platforms. Operating a platform for trading crypto assets classified as securities under the FIEA without proper registration will constitute a more severe legal breach. The Financial Services Agency (FSA) will gain enhanced supervisory and enforcement tools to police the market, ensuring platforms adhere to strict operational standards regarding customer asset segregation, anti-money laundering protocols, and overall market conduct. This creates a higher barrier to entry and a stronger deterrent against illicit operations.

The regulatory transition from the Payment Services Act (PSA) to the Financial Instruments and Exchange Act (FIEA) will reshape Japan’s crypto market structure. Legitimate exchanges and token issuers will need to adapt to a new compliance regime with heavier reporting and disclosure burdens. While this may increase operational costs in the short term, the long-term goal is to foster a more stable, transparent, and trustworthy ecosystem that attracts institutional investors and protects retail participants. The clarity provided by a securities law framework could reduce legal uncertainty for businesses operating in the space.

Japan’s move also reflects a broader, global trend of integrating cryptocurrency markets into traditional financial (TradFi) regulatory paradigms. By choosing to regulate through its established securities law, Japan is making a definitive statement that many crypto assets are investment vehicles. This positions the country’s regulatory stance in ongoing international dialogues about digital asset oversight. The success of this transition, managed by the Financial Services Agency (FSA), will be closely watched by other nations considering similar pathways to bridge the gap between innovative crypto markets and proven investor protection frameworks.