Japan’s Regulator Moves to Force Crypto Exchanges to Build Hack Liability Reserves
Japan’s top financial regulator, the Financial Services Agency (FSA), is preparing a new rulebook that would significantly raise the bar for crypto exchanges operating in the country. Under a forthcoming legal framework, trading platforms will be required to maintain dedicated liability reserves to reimburse customers in the event of hacks or other security incidents.
The initiative is part of a broader effort by Japanese authorities to rebuild confidence in digital asset markets after a decade marked by spectacular failures—from the collapse of Mt. Gox in 2014 to the recent large‑scale hack at DMM Bitcoin in 2024.
New legal framework planned for 2026
According to the current plan, the FSA intends to submit draft legislation to Japan’s parliament in 2026. The proposed law will introduce a formal obligation for cryptocurrency exchanges to set aside financial reserves specifically earmarked for compensating users if their assets are lost due to cyberattacks, insider theft, or other operational breaches.
This marks a shift from the existing system, which focuses primarily on safeguarding customer assets through segregation and custody rules, but does not always guarantee that exchanges have sufficient capital to cover large‑scale losses out of their own pocket.
Modeled on traditional securities firms
The FSA’s blueprint is expected to closely resemble the requirements already imposed on traditional securities companies in Japan. Conventional brokerages must maintain liability reserves within a band that generally runs from about $12.7 million to $255 million (roughly ¥2 billion to ¥40 billion), depending on the scale of their trading activity and the risks they take on.
A similar risk‑based model is likely to be applied to crypto exchanges. Larger platforms with higher trading volumes and more assets under custody would be required to hold more substantial reserves. Smaller operators would face lower minimum thresholds but would still need to demonstrate the capacity to reimburse customers in severe loss scenarios.
Closing gaps in responsibility
Until now, many crypto exchanges worldwide have been able to limit their responsibility for losses by relying on disclaimers in their terms of service, or by arguing that customers bear some of the technological risks inherent to blockchain systems. Even where compensation has been offered after a hack, it has often been discretionary or partial, and in some cases has taken years to complete.
Japan’s planned framework is designed to remove that ambiguity. By legally obligating platforms to maintain liability reserves, regulators want to make customer compensation a defined, enforceable duty rather than a voluntary gesture. That means exchanges would need to think about risk in a similar way to regulated financial institutions: quantifying potential losses and provisioning capital against them.
From Mt. Gox to DMM Bitcoin: a decade of hard lessons
Japan has been at the epicenter of several of the most infamous incidents in crypto history. Mt. Gox, once the world’s largest Bitcoin exchange, collapsed after losing hundreds of thousands of bitcoins in what was then the defining crypto hack. Later, the Coincheck hack in 2018 resulted in the theft of over half a billion dollars’ worth of NEM tokens.
More recently, DMM Bitcoin suffered a major breach, with attackers siphoning off a substantial amount of Bitcoin—again highlighting the vulnerability of centralized platforms and the growing sophistication of cybercriminals. Each episode has triggered regulatory tightening, but also exposed new weaknesses in oversight and risk management.
The FSA’s latest move can be seen as an attempt to finally close the loop: not only requiring better security practices, but also ensuring that, when those defenses fail, users are not left bearing the brunt of the damage.
What liability reserves mean in practice
For exchanges, liability reserves are not just a line item on a balance sheet. They influence nearly every aspect of how a platform operates:
– Capital allocation: Exchanges will need to retain more cash or highly liquid assets, rather than plowing all profits into expansion, marketing, or speculative investments.
– Risk management: Platforms will be incentivized to reduce hack risk, because stronger security could justify lower required reserves under a risk‑based framework.
– Insurance integration: More exchanges may turn to third‑party insurance or captive insurance structures to complement reserves and smooth the cost of catastrophic events.
– Governance and audits: Regulators are likely to demand transparent accounting, regular reporting, and external audits to verify that reserves actually exist and are segregated from operating funds.
In practical terms, the requirement creates a safety buffer between customers and the full impact of a system failure or cyberattack.
Impact on customers: stronger protection, possible higher costs
For retail and institutional users, the most visible benefit will be clearer assurances that they can be made whole if an exchange is compromised. Instead of vague promises or case‑by‑case decisions, customers would have a legal framework on their side, backed by explicit financial reserves.
However, this protection is unlikely to be free. Exchanges may respond by:
– Increasing trading or withdrawal fees
– Tightening listing criteria to reduce technical risk
– Limiting high‑risk products such as highly leveraged derivatives
– Slowing down expansion into experimental services that are harder to model from a risk perspective
Japanese regulators appear willing to accept these trade‑offs if it results in a more stable, trustworthy crypto market.
Competitive landscape: barrier or quality filter?
The new rules could reshape Japan’s crypto ecosystem. Well‑capitalized exchanges may welcome the move, seeing it as a way to differentiate themselves from underfunded competitors and to attract institutional money that demands robust governance.
Smaller or lightly capitalized platforms, by contrast, may struggle to meet the reserve requirements. Some may:
– Consolidate through mergers and acquisitions
– Exit the Japanese market
– Pivot to non‑custodial or purely technological services that fall outside the exchange category
In the medium term, this could reduce the number of operators but raise the average quality and resilience of those that remain.
How this fits into Japan’s broader regulatory stance
Japan has often taken a more proactive and structured approach to crypto regulation than many other major economies. The country already mandates that customer crypto assets be strictly segregated from corporate funds and, in many cases, held in cold storage. Exchanges are required to register, undergo inspections, and comply with anti‑money‑laundering and know‑your‑customer obligations.
The planned liability‑reserve system extends this philosophy: treat crypto service providers more like traditional financial institutions, especially when they perform custody or brokerage‑like functions. It aligns with a global trend in which policymakers are less willing to see digital assets as a lawless frontier, and more eager to fold them into mainstream regulatory frameworks.
Potential technical details regulators will need to address
For the new regime to function effectively, the FSA will need to clarify several operational questions:
– How reserves are calculated: Will they be based on total assets under custody, trading volume, historical incident data, or some combination of these factors?
– What counts as eligible reserves: Will exchanges be allowed to hold reserves in fiat, stablecoins, government bonds, or only in very low‑risk instruments?
– Treatment of different asset classes: High‑volatility tokens might warrant higher reserve ratios than stablecoins or tokenized real‑world assets.
– Cross‑border issues: Global exchanges operating in Japan may need to ring‑fence capital locally instead of relying on group‑wide balance sheets.
Clear guidance on these points will be essential to avoid regulatory arbitrage and ensure that reserves are both real and usable in a crisis.
Implications for global crypto regulation
Japan’s approach could become a template for other jurisdictions watching from the sidelines. If the liability‑reserve model proves effective—limiting user losses, stabilizing the market, and not suffocating innovation—it may inspire similar frameworks elsewhere.
Conversely, if the rules are perceived as excessively burdensome and lead to an exodus of exchanges or a sharp decline in liquidity, other countries may hesitate to adopt such strict measures. Much will depend on how flexibly the FSA applies the framework and how well it balances prudential safeguards with market competitiveness.
What exchanges should be doing now
Even though the formal legislation is slated for 2026, exchanges operating in or targeting the Japanese market would be wise to start preparing early by:
– Conducting internal stress tests to estimate potential losses from various hack scenarios
– Reviewing their capital structure and liquidity position
– Considering cyber insurance products and reinsurance arrangements
– Strengthening internal controls, access management, and incident‑response procedures
– Building compliance and legal teams capable of engaging with regulators as the rules are finalized
Early movers that align with the expected standards ahead of time may find it easier to secure licenses, attract institutional clients, and market themselves as safer venues.
Toward a more mature crypto market in Japan
The FSA’s plan to require liability reserves is more than a technical tweak—it’s a signal that Japan wants its crypto sector to function with the same level of accountability expected from traditional finance. After a long history of painful lessons, the focus is shifting from merely preventing disasters to ensuring that, when they do happen, ordinary users are not left unprotected.
If implemented effectively, this framework could push exchanges to adopt more robust risk management, clean up weaker operators, and gradually transform Japan into one of the more trusted environments in which to trade and custody digital assets.