Japan Set to Revolutionize Crypto Regulation with Financial Product Reclassification & Major Tax Reform

Japan's Financial Services Agency (FSA) is preparing what could be the most significant overhaul of cryptocurrency regulation in the country's history, with plans to reclassify digital assets as financial products and implement dramatic tax cuts that industry observers say could reshape the nation's position in the global crypto landscape.

The Proposed Framework: A Paradigm Shift

The FSA is preparing an overhaul of the country's crypto regulatory framework, moving to classify digital assets as "financial products" under the Financial Instruments and Exchange Act. The plan includes the reclassification of 105 digital assets — such as bitcoin and ether — as financial products under the Financial Instruments and Exchange Act, in addition to a tax relief package aimed at gains obtained from these assets.

Under the proposed framework, cryptocurrencies approved for domestic exchange listings would be subject to the same legal protections and regulatory standards as traditional securities like stocks and bonds. Exchanges would be required to disclose detailed information about each of the 105 tokens they list, including whether the asset has an identifiable issuer, the blockchain technology underpinning it, and its volatility profile.

This represents a fundamental shift in how Japan treats digital assets. Rather than existing in regulatory limbo or being treated primarily as payment mechanisms, cryptocurrencies would gain full recognition as legitimate investment vehicles with corresponding investor protections.

Tax Revolution: From Punitive to Competitive

Perhaps the most consequential aspect of the FSA's proposal concerns taxation. Currently, Japan operates one of the world's most burdensome tax regimes for cryptocurrency investors. Japan currently taxes crypto earnings as "miscellaneous income," meaning high-earning traders can face rates of up to 55%, one of the steepest systems in the world.

The agency now wants gains on the 105 approved cryptocurrencies to be taxed similarly to stocks, at a flat 20% capital gains rate. This would represent a reduction of up to 35 percentage points for high-income traders and bring Japan in line with other major financial centers competing for crypto investment.

The current miscellaneous income classification has long been identified as a major impediment to both retail and institutional participation in Japan's crypto market. By treating cryptocurrency gains as ordinary income subject to progressive taxation, Japan effectively discouraged serious investment and drove capital to more tax-friendly jurisdictions.

Insider Trading Protections and Market Integrity

Beyond taxation, the FSA's proposal includes significant measures to address market manipulation and insider trading in the cryptocurrency sector. Under the bill, individuals or entities with access to non-public information, such as upcoming listings, delisting plans or an issuer's financial distress, would be prohibited from buying or selling affected tokens.

This marks the first time Japan would formally apply insider trading regulations to the cryptocurrency market, bringing digital assets under the same market conduct standards that govern traditional securities. The move reflects a maturation of regulatory thinking, recognizing that as crypto markets grow in sophistication and institutional participation, they require the same safeguards against manipulation that protect equity and bond markets.

Japan's Crypto Journey: From Pioneer to Bottleneck

Japan's relationship with cryptocurrency regulation has been complex and evolutionary. In 2016, it recognized Bitcoin as a legal form of payment under the Payment Services Act, making it one of the first major economies to provide legal clarity for digital assets. However, this early framework treated crypto primarily as a payment method rather than an investment vehicle.

The regulatory environment tightened considerably following a series of high-profile security breaches. The 2018 Coincheck hack, which resulted in the theft of approximately $530 million in digital currency, prompted regulators to impose stricter oversight. Amendments to the PSA now require cryptocurrency exchanges to register with the FSA in order to operate – a process that can take up to six months and imposes stricter cybersecurity and anti-money laundering/counter-terrorist financing requirements.

While these measures successfully enhanced security and consumer protection, they also created a rigid regulatory environment that some industry participants found stifling. By the end of 2024, Japan had around 11.8 million crypto accounts, an increase of about three million from the previous year, suggesting steady but not explosive growth compared to other major markets.

Political Momentum and Leadership Support

The current push for reform has gained momentum under recent political leadership. Much of the current effort began under former Japanese Prime Minister Shigeru Ishiba, who flagged cryptocurrencies as extremely important in addressing Japan's long-standing social and economic challenges.

The political landscape has since shifted, with current Japanese Prime Minister Sanae Takaichi also viewed as supportive of emerging technology, and her government expected to continue the country's pro-tech direction. Takaichi, who became Japan's first female prime minister in October 2025, has signaled openness to cooperation with opposition parties that have historically supported cryptocurrency tax reforms.

Takaichi has indicated intentions to strengthen cooperation with the Japan Innovation Party and the Democratic Party for the People, which have historically supported cryptocurrency tax reforms. This cross-party support could prove crucial in advancing the FSA's proposals through Japan's parliament.

Timeline and Implementation

The regulatory changes are expected to follow a deliberate timeline. These changes are expected to be presented as amendments to Japanese financial laws during the Diet's regular session in 2026. This gives stakeholders time to prepare for implementation while allowing for public debate and refinement of the proposals.

The FSA has been methodical in its approach. The FSA has been holding closed-door discussions with legal and financial experts since October 2024. The agency plans to finalize its policy direction by June 2025, with legislative changes expected in 2026.

Banking Sector Integration: A New Frontier

Beyond the core reclassification and tax proposals, Japanese regulators are exploring even more transformative changes to how financial institutions can interact with digital assets. Japanese regulators are also weighing whether banks should be allowed to acquire and hold cryptocurrencies. Back in 2020, the FSA imposed guidelines that effectively barred banks from taking crypto onto their balance sheets due to volatility concerns, but the agency is now reviewing those restrictions.

The FSA reportedly plans to discuss whether banks should be allowed to hold digital assets directly and whether banking groups should be permitted to register as licensed cryptocurrency exchanges. If implemented, this would represent one of the most significant integrations of traditional banking and cryptocurrency globally, as few major economies currently permit commercial banks to hold crypto assets on their balance sheets or operate exchange businesses.

Stablecoin Innovation and Payment Infrastructure

Parallel to the cryptocurrency reclassification efforts, Japan has been advancing its stablecoin ecosystem. The country is running the FSA's Payment Innovation Project, a trial that supports the joint initiative by major banks to issue yen-based stablecoins and test blockchain-powered settlement systems for institutional payments.

The Financial Services Agency launched the Payment Innovation Project on November 7, 2025, letting major banks jointly test blockchain-based stablecoin issuance. The initiative brings together Japan's financial giants—Mitsubishi UFJ Financial Group, Sumitomo Mitsui Banking Corporation, and Mizuho Financial Group—in a collaborative effort to modernize the country's payment infrastructure.

The stablecoin push has already yielded tangible results. JPYC Inc., a Tokyo-based fintech company, received regulatory approval to launch Japan's first yen-backed stablecoin in 2025. JPYC stated that it aims to issue 10 trillion yen ($66 billion) worth of stablecoins, which are also called JPYC, over a three-year period and hopes to soon take these coins overseas.

The company's strategy includes waiving transaction fees initially to drive adoption, instead generating revenue from interest on holdings of Japanese government bonds. This innovative funding model could make JPYC an attractive option for both domestic and international users seeking low-cost digital payment rails.

Global Context and Competitive Positioning

Japan's regulatory evolution occurs against a backdrop of intense global competition for crypto investment and innovation. While the United States has struggled with regulatory fragmentation and enforcement-heavy approaches, and China has maintained strict prohibitions on cryptocurrency trading, Japan is attempting to chart a middle course that balances innovation with investor protection.

In 2024, it requested that Apple and Google remove five platforms—Bybit, KuCoin, MEXC Global, LBank, and Bitget—from their app stores in Japan, demonstrating that Japan's pro-innovation stance doesn't mean abandoning consumer protection or regulatory oversight.

The proposed 20% capital gains tax rate would position Japan competitively with other Asian financial centers. Singapore, for example, does not tax individual capital gains on cryptocurrency, while Hong Kong has implemented a licensing regime for exchanges but maintains favorable tax treatment for investors.

Industry Response and Expectations

The cryptocurrency industry in Japan has broadly welcomed the FSA's proposals, seeing them as long-overdue corrections to regulatory impediments. Industry associations, including the Japan Crypto Asset Business Association and the Japan Virtual and Crypto Assets Exchange Association, have been lobbying for tax reform for years.

The potential impact on market participation could be substantial. The current 55% tax rate has been described by industry advocates as preventing citizens from participating meaningfully in the digital asset economy. A shift to 20% taxation could unleash pent-up demand from both retail investors who have been discouraged by tax consequences and institutional investors who have avoided the Japanese market due to unfavorable treatment compared to traditional assets.

Challenges and Uncertainties

Despite the positive momentum, significant uncertainties remain. The new classification raises concerns about restrictions on retail investors, as bringing cryptocurrencies under the Financial Instruments and Exchange Act could potentially introduce new compliance burdens or limitations on who can invest.

There are also questions about how the reclassification will affect the diverse range of tokens in the market. The FSA's focus on 105 specifically approved cryptocurrencies means that many tokens available globally may not receive the same treatment in Japan, potentially limiting investor choice or pushing some activity to unregulated venues.

The political dimension also introduces variables. While current leadership appears supportive, Takaichi's conservative orientation could lead to stricter measures against money laundering and terrorist financing, potentially balancing pro-innovation policies with enhanced compliance requirements.

Implications for Web3 and Innovation

Beyond immediate market impacts, Japan's regulatory reforms could have far-reaching implications for Web3 development and blockchain innovation more broadly. By providing clarity on how cryptocurrencies will be regulated and taxed, the FSA is creating a more predictable environment for startups and developers.

In April 2024, corporate tax exemptions on unrealized crypto gains were introduced, encouraging corporate involvement in the sector. This earlier reform, combined with the proposed personal capital gains changes, creates a comprehensive framework that addresses taxation at both corporate and individual levels.

The potential approval of cryptocurrency exchange-traded funds represents another significant opportunity. One expected impact of the new regulations is the potential approval of spot crypto exchange-traded funds (ETFs). These are currently prohibited in Japan. ETFs would provide traditional investors with familiar investment vehicles for gaining crypto exposure, potentially channeling significant new capital into the market.

International Implications and Regional Leadership

Japan's moves are being closely watched throughout Asia and globally as a potential model for cryptocurrency regulation. Unlike the U.S. or EU, where regulatory fragmentation has stifled growth, Japan's centralized oversight model provides clarity for market participants.

The stablecoin initiatives, in particular, carry geopolitical significance. With U.S. dollar-denominated stablecoins currently dominating the global market, a successful yen-backed alternative could reduce dependence on dollar-based settlement systems and enhance Japan's financial sovereignty. The Bank for International Settlements has assessed that, owing to support from Trump, dollar-backed coins now account for 99% of the global stablecoin supply.

Looking Ahead: The 2026 Parliamentary Session

As Japan moves toward the regular parliamentary session in 2026, when the FSA's proposals are expected to be formally considered, stakeholders across the financial services industry are preparing for what could be a watershed moment in the country's digital asset evolution.

The success of these reforms will depend on multiple factors: the ability of parliament to forge consensus across party lines, the FSA's capacity to implement new regulations effectively without stifling innovation, and the market's response to the new framework once implemented.

If successful, Japan could emerge as one of the world's most attractive jurisdictions for cryptocurrency investment and innovation, combining the regulatory clarity and investor protections of developed markets with competitive tax treatment and a forward-looking approach to digital asset integration. The 105 cryptocurrencies targeted for reclassification would gain legitimacy and liquidity, while investors would benefit from clear rules and fair taxation. 

However, if implementation falters or if additional restrictions undermine the benefits of tax reform, Japan risks maintaining its current position as a market with significant potential but limited realization. The stakes are high, not just for Japan's domestic crypto industry, but for the country's broader ambitions to remain at the forefront of financial innovation in an increasingly digital global economy. Follow us for more latest crypto news.

For now, the cryptocurrency community in Japan and internationally watches with anticipation as one of the world's largest economies prepares to fundamentally reimagine its relationship with digital assets.