crypto

The 5th Meeting of the Financial System Council Working Group on Crypto-Assets

Norbert Gehrke

10 Nov 2025 — 15 min read

The Financial Services Agency (FSA) hosted the 5th Meeting of the Financial System Council Working Group on Crypto-Assets on November 7, 2025. The meeting focused on consolidating previous discussions and presenting specific proposals for regulatory reforms concerning crypto assets in Japan, particularly addressing the shift of crypto assets towards investment purposes and the need for enhanced investor protection and market integrity.

The discussion covered eight main themes:

Current Status and Challenges of Crypto Asset Transactions
Required Responses, including
legislative approach (Financial Instruments and Exchange Act - FIEA),
information disclosure,
business regulations,
improving literacy,
cybersecurity,
market establishment rules, and
unfair trading regulations (insider trading).

1. Current Status and Challenges of Crypto Asset Transactions

1.1. Current Status

The regulation of crypto assets is currently primarily governed by the Payment Services Act (PSA), focusing on their function as a payment method. However, the market situation has significantly evolved, indicating a pronounced shift toward investment.

Key data points highlighted the investment trend:

The number of crypto asset exchange accounts in Japan has exceeded 12 million, with client deposit balances surpassing JPY 5 trillion, reaching a scale greater than FX (Foreign Exchange) trading.
A survey indicated that approximately 70% of crypto asset holders have an annual income below JPY 7 million, and over 80% of individual accounts hold less than JPY 100,000, suggesting widespread ownership among ordinary individuals.
For investors with investment experience, the proportion holding crypto assets (7.3%) is higher than those holding FX or corporate bonds, and 86% of users are motivated by expectations of long-term value increase.
Globally, the investment trend is accelerating, with Bitcoin ETFs listed in many jurisdictions, including the US, where institutional investors like pension funds are increasingly investing in crypto asset ETFs.
The Financial Services Agency's (FSA) "Financial Service User Consultation Office" receives over 350 complaints/consultations per month regarding crypto assets, with the majority concerning fraudulent solicitations and transactions, further underscoring the growing recognition of crypto assets as an investment target among the general public.

1.2. Urgent Challenges

Given the expansion of crypto asset investment and subsequent user harm, the FSA identified several urgent challenges requiring regulatory action from an investor protection perspective:

Enhancement of Information Disclosure: Issues include unclear whitepapers/explanatory materials provided during issuance, discrepancies between documented content and actual code, and a lack of mechanisms for Crypto Asset Exchange Providers (CAEPs) to ensure accurate information from issuers.
Investor Protection and Response to Unregistered Businesses: The rise of unregistered entities, including those based overseas, soliciting investments, and a significant number of consultations regarding fraudulent solicitations directed at the FSA. There is also a need to ensure investments align with individual risk tolerance and financial capacity.
Addressing Inappropriate Conduct in Investment Management: The emergence of investment seminars and online salons related to crypto assets, some of which are suspected of malicious activities, such as defrauding users of funds.
Ensuring Price Formation and Fair Trading: Strengthening measures against fraud and market abuse, including insider trading, as advised by IOSCO and implemented in jurisdictions like Europe.
Security Assurance: Continuous incidents of crypto asset leakage due to hacking of CAEPs necessitate stricter measures for safeguarding client assets.

2. Required Responses

2.1. Approach to Regulatory Review

The proposed regulatory review aims to strengthen investor protection by establishing regulations suited to the characteristics of crypto assets as investment products, in light of the investment trend and the prevalence of fraudulent solicitation.

The FSA explicitly stated that regulatory review does not constitute an endorsement of crypto asset investment. The goal is to establish a sound trading environment under the premise that investors fully understand the risks and product characteristics of crypto assets and limit their investments to what they can afford to lose.

Key considerations for the review:

Balancing investor protection with healthy innovation.
Recognizing the international nature of crypto asset transactions.
Maintaining regulatory flexibility due to the rapid technological and business evolution in the sector.
Ensuring that regulations do not restrict the potential use of crypto assets for payment purposes.
Focusing protection measures primarily on general retail investors, who constitute the core of the current crypto asset trading market.
While applying regulations similar to those for typical securities is essential for market integrity, the regulations must acknowledge that crypto assets originated outside existing financial frameworks and have aspects (such as facilitating illicit fund transfers) that are distinct from traditional securities.

2.2. General Principles

2.2.1. Utilizing the Framework of the Financial Instruments and Exchange Act (FIEA)

The urgent challenges surrounding crypto asset investment closely align with issues traditionally addressed by the FIEA. Therefore, leveraging the FIEA’s mechanisms and enforcement capabilities is considered appropriate. Given that much of the crypto asset trading is driven by the expectation of returns from price fluctuations, incorporating crypto assets into the FIEA framework is consistent with the law's aim to broadly regulate investment products.

However, since crypto assets generally do not represent legal rights, nor do they typically involve distribution of profits or residual assets, they differ from "securities" under the FIEA. Thus, they should be positioned under the FIEA as a separate category of regulated assets, distinct from securities.

2.2.2. Scope of Crypto Assets under the FIEA

The scope of crypto assets to be regulated under the FIEA should align with the current definition of crypto assets under the PSA.

NFTs (Non-Fungible Tokens): NFTs, which are not currently regulated under the PSA, are often used for providing goods or services. Given the diversity of their characteristics, caution is required before subjecting them to uniform financial regulation.
Stablecoins (Digital Money): Digital money-like stablecoins are regulated under the PSA. While they are pegged to fiat currencies and intended for broad use as a payment/settlement method, they are currently less likely to be viewed primarily as investment vehicles.

2.2.3. Regulation under the Payment Services Act (PSA)

The existing business regulations for CAEPs under the PSA largely overlap with the proposed regulations under the FIEA. To avoid regulatory complexity, it is appropriate to remove crypto asset regulations from the PSA and consolidate all necessary regulations under the FIEA by introducing equivalent provisions tailored to crypto assets. Even with FIEA regulation, the use of crypto assets for payment purposes will not be restricted, and enhanced regulatory oversight will benefit users seeking payment utility.

2.3. Information Disclosure Regulation

Information disclosure is categorized into initial disclosure (at the time of new sales) and continuous disclosure.

2.3.1. Initial Disclosure (New Sales)

Crypto assets suffer from significant information asymmetry, mainly due to two factors:

Technicality and Specialization: Since many investors find it difficult to understand the underlying code or verify the accuracy of the whitepaper, essential information about the asset's nature, function, supply, underlying technology, attached rights/obligations, and inherent risks must be provided in an easily understandable format for retail investors.
Substantive Control over Value Source (Centralized Management): When a centralized manager exists, their actions can influence the asset's value. In this case, additional information about the manager (identity, use of raised capital, project details, crypto asset holdings) must be disclosed to investors.

Disclosure Requirements:

CAEPs, who are responsible for scrutinizing crypto assets before listing, should be the primary party responsible for collecting this information from issuers and presenting it to customers in an easily understandable format.
For centralized crypto assets where the manager (issuer) seeks to raise funds from general investors, the issuer should also be obligated to provide information to resolve information asymmetry.

Scope of Regulated Activities:

Information disclosure regulations should apply when an issuer raises capital through the sale of crypto assets, covering both primary sales (newly issued) and secondary sales (already issued) used for fundraising.
Activities like airdrops (gratuitous distribution) or automated token grants as rewards (e.g., staking rewards) are generally excluded as they do not constitute fundraising by the issuer.
Even when an issuer is not fundraising, if a CAEP handles the crypto asset, the CAEP is obligated to collect public information about the asset's technical specifications and the centralized manager (if any) and provide it to customers.

Method and Timing of Disclosure:

Information prepared by the issuer should be disclosed on the issuer's website, etc., and also published by the CAEP handling the asset, before solicitation to investors.
CAEPs must investigate if a centralized crypto asset is "guerilla-listed" (listed without the issuer’s involvement) and being sold by the issuer to raise funds; if so, the CAEP should be obligated to refuse the sale.
To ensure accessibility, all disclosed information should also be made available on the website of the Self-Regulatory Organization (SRO).

2.3.2. Continuous Disclosure (Post-Sale)

Continuous disclosure is essential to resolve information asymmetry for investors participating in the secondary market. Given the rapid evolution of crypto asset technology, timely disclosure is particularly critical.

Timely Disclosure: Issuers or CAEPs should be obligated to promptly disclose events that could have a significant impact on investment decisions. The specific types of events warranting timely disclosure should be clarified in practice.
Periodic Disclosure: While timely disclosure is paramount, the need for periodic disclosure is relatively lower compared to traditional securities (whose value is directly linked to the issuer's annual business profits). To aid investor convenience in grasping the issuer's overall recent activities, annual periodic disclosure by the issuer is proposed, serving as a supplement to timely disclosure.

Suspension/Exemption of Continuous Disclosure Obligation:

If a centralized crypto asset becomes sufficiently decentralized such that the original issuer's activities are no longer material to investment decisions, the continuous disclosure obligation on the issuer may be lifted by the authorities. However, CAEPs should retain disclosure obligations due to the persistent technical information asymmetry.
If all CAEPs in Japan cease handling a specific crypto asset, the continuous disclosure obligation for that asset may be exempted if deemed unnecessary for investor protection.

2.3.3. Ensuring Accuracy of Information

To ensure the accuracy of disclosed information, regulations are proposed in two areas:

Discipline for Obligated Parties (Issuers/CAEPs): Penalties and civil liability rules should be established for false statements or failure to provide information by issuers and CAEPs, similar to the FIEA provisions for securities filings. Furthermore, if false statements are identified, CAEPs should be subject to measures such as the suspension of trading of that crypto asset across the domestic market.
Strengthening Check Mechanisms (Audits/Reviews):
- CAEPs must be statutorily obligated to conduct reviews and establish the necessary internal systems.
- CAEPs should be mandated to seek code audits by technically specialized third parties and obtain opinions from the SRO during the review process.
- The SRO should enhance its neutrality and independence by establishing a statutory independent committee or body to conduct centralized review operations.
- The SRO should be allowed to delegate part of its review functions to highly specialized third parties.

2.4. Business Regulations

2.4.1. General Principles and Individual Issues

Crypto asset sales and related services should fundamentally be subject to regulations similar to those applied to Type I Financial Instruments Business Operators under the FIEA. Existing special regulations under the PSA concerning the unique nature of crypto assets should be transitioned into new equivalent regulations under the FIEA.

Individual Issues:

Concurrent Business Regulation: CAEPs engaging in other businesses should be subject to a degree of administrative pre-check, such as requiring prior notification for ancillary businesses, to mitigate conflicts of interest and risks.
Client Asset Management: Given the high risk of unauthorized outflow of crypto assets, the current special rules on security management must be maintained. New statutory obligations for the safe management of client assets, covering the entire supply chain, must be established. Specific security measures should be flexibly defined in guidelines rather than in law, reflecting technological advancements.
Liability Reserve (Compensation Fund): Due to the hacking risk affecting assets even in "cold wallets" (offline storage), CAEPs should be required to accumulate an appropriate level of liability reserves, based on past incidents and security standards, without imposing excessive burdens. The use of insurance as an alternative or supplement to cash reserves should be permitted.
Business Management System: CAEPs must establish enhanced business management systems, including:
- Review systems for handling crypto assets.
- Systems to confirm that customers trade within their risk-bearing capacity (customer suitability checks).
- Trading monitoring systems.
- Systems to suspend handling if an issuer violates information disclosure rules.
Orderly Return of Client Assets upon Exit: Regulations governing the return and transfer of client assets when a financial firm exits the market should be extended to CAEPs to ensure the smooth and appropriate return of crypto assets, including those held as liability reserves.
Intermediary Business Regulation: Crypto asset intermediary businesses, newly established under the 2025 PSA amendment, should be incorporated into the scope of Financial Instruments Intermediary Business under the FIEA, applying relevant regulations (e.g., rules for external officers).

2.4.2. Treatment of Banks and Insurance Companies

The direct involvement of banks and insurance companies (financial institutions) in issuing or trading crypto assets remains a subject requiring careful consideration due to several persistent risks:

Risks to the Institution: Money laundering, system risks related to management, and price fluctuation risks resulting in reputational damage.
Investor Protection Concerns: The public's perception that products handled by banks/insurance companies are inherently safe could lead to customers trading without proper assessment of crypto asset risks.

Specific Proposals:

Issuance/Trading by Financial Institutions: Careful deliberation is required after establishing a sound regulatory environment for investor protection.
Intermediation by Financial Institutions: Also requires careful consideration due to investor protection concerns.
Holding for Investment Purposes (Own Account): Permitting banks and insurance companies to hold crypto assets for their own investment purposes is considered appropriate, provided they establish sufficient risk management and governance structures. However, investment management businesses using crypto assets should remain prohibited for financial institutions' main bodies.
Subsidiaries of Financial Groups: Given the broader permissible scope of activities for subsidiaries, the limited potential for perceived endorsement by the parent company, and the presence of risk separation mechanisms, allowing subsidiaries to engage in issuance, trading, and intermediation of crypto assets is deemed appropriate. This aligns them with general financial instruments businesses. Similarly, subsidiaries should be allowed to conduct investment management businesses involving crypto assets.

2.4.3. Response to Unregistered Businesses

Addressing Illegal Solicitation:

Applying FIEA rules concerning unregistered financial businesses to crypto assets, thus strengthening criminal penalties for unregistered sales/trading.
Equipping the authorities (Securities and Exchange Surveillance Commission - SESC) with powers such as issuing emergency cease-and-desist orders and conducting necessary investigations.
Considering the creation of civil effect rules to address investor damage caused by fraudulent solicitations by unregistered foreign entities.

Investment Management and Advice:

Crypto asset investment management and advice should be subject to the Investment Management Business and Investment Advisory Business regulations, respectively, to ensure appropriate operation.

Prevention of Fraudulent Use of Crypto Assets as Payment:

To prevent crypto assets from being used as a means of payment in fraudulent investment schemes, CAEPs must be obligated to:
- Issue warnings regarding potentially fraudulent cases.
- Confirm the purpose of transfers when customers move crypto assets to unhosted wallets or wallets associated with unregistered businesses.
- Conduct appropriate transaction monitoring.
- Implement mandatory "cooling-off" periods for new accounts or transfers to newly registered wallet addresses.

Response to Foreign Unregistered Businesses and DEXs:

Foreign Unregistered Businesses: The FSA will continue to issue warnings and request the removal of Japanese-language websites soliciting investment in Japan. Rules allowing foreign securities firms to accept unsolicited orders from Japanese residents should be applied similarly to crypto asset transactions.
DEXs (Decentralized Exchanges): Currently, there is no established method for regulating DEX protocols, which are often developed and operated with minimal human intervention. The FSA will continue to study appropriate, risk-based regulations in coordination with international developments. Meanwhile, providers of user interfaces (UIs) that connect to DEXs should be subject to regulation, considering their explanatory and AML/CFT obligations based on the associated risks. A key priority is to raise public awareness that using DEXs or foreign unregistered businesses carries risks of unforeseen losses.

2.5. Improving Literacy for Crypto Asset Investment

Measures are necessary to encourage cautious investment and improve financial literacy:

Encouraging Cautious Trading: CAEPs should be prohibited from making representations that impede the correct understanding of risks (e.g., emphasizing past performance or future price predictions). They should also establish systems to confirm that customers trade within their risk-bearing capacity and enforce strict adherence to SRO rules regarding trading limits and account opening criteria.
Risk Awareness for DEXs/Unregistered Entities: Government agencies and CAEPs must continuously inform the public about the risks of using DEXs and foreign unregistered businesses.
Financial Literacy Improvement: Educational materials should be updated to not only prevent financial fraud but also to enlighten investors about the specific risks of crypto assets (price volatility, hacking risks leading to asset loss, and the importance of investing only spare capital).

2.6. Cybersecurity Initiatives

Policy Direction: Given the constantly evolving and sophisticated nature of cyberattacks, the law should impose fundamental obligations for establishing necessary systems, while the specific technical and operational requirements should be set forth in flexible guidelines.

Industry and FSA Initiatives: The FSA will continue its support (e.g., guidelines, monitoring, exercises). However, cyberattacks targeting financial institutions are often nation-state level, requiring a combination of self-help, mutual-help (industry-wide collaboration), and public assistance. The development of mutual-help initiatives within the industry is deemed essential.

2.7. Market Establishment Regulations

Domestic Crypto Asset "Exchanges" (Matching Platforms): Many CAEPs currently operate matching platforms (order books). While suitable transaction management and system maintenance are required to ensure fairness and neutrality, strict market establishment regulations (such as the licensing requirements for FIEA-regulated exchanges or the approval for PTS systems) are deemed unnecessary, given that the price formation function of individual crypto asset platforms is limited by the nature of crypto assets.

Listing on Existing Financial Instruments Exchanges: Permitting existing securities exchanges to list crypto assets (spot) would expose these exchanges to the risk of massive asset leakage through hacking (similar to CAEPs). If the market scale grew, this could pose a significant risk to the operation of the exchange's core securities or derivatives markets. Therefore, extreme caution is warranted regarding allowing existing exchanges to list spot crypto assets at this time.

2.8. Unfair Trading Regulations

2.8.1. Insider Trading Regulation

Based on international recommendations and enforcement cases (e.g., in the US), Japan should establish insider trading regulations for crypto assets.

Protected Interest: The regulations should primarily protect the "trust of investors in the fairness and integrity of the trading venue provided by domestic CAEPs." This focus is justified because transactions on domestic CAEP platforms are subject to Japanese law and SRO review, fostering greater investor trust compared to overseas platforms or DEXs.

Regulatory Framework (Based on FIEA): The regulation must prohibit buying or selling that undermines investor trust in the trading venue by individuals in a "special position" (insiders) who have access to "material non-public information" concerning "target crypto assets" before such information is "made public." The specific framework should adapt the FIEA's securities insider trading rules, while considering the unique characteristics of crypto assets.

Target Crypto Assets:

The regulations should cover crypto assets handled by domestic CAEPs.
To ensure effectiveness, crypto assets for which a formal application for handling has been filed with a CAEP should also be included in the scope.
The SRO should be responsible for making the list of regulated crypto assets publicly available to ensure clarity.

Material Facts (Important Information):

Since there is limited accumulated knowledge on typical material facts for crypto assets, the framework should list specific categories (like securities) and use a "basket clause" to cover other relevant facts.
Three core categories are proposed:
1. Material facts concerning the business operations of the issuer of centralized crypto assets.
2. Material facts concerning the handling or activities of CAEPs related to the asset.
3. Material facts concerning large-scale transactions (e.g., sale/purchase of 20% or more of the circulating supply).

Note: Foreign policy changes or external analysis information that are excluded from material facts for securities are also excluded for crypto assets to ensure clarity and avoid chilling effects.

Insiders and Public Disclosure:

Insiders: Individuals in a special position who obtain non-public material facts due to their position (e.g., officers/employees of the issuer or CAEP, and their primary recipients) are targeted.
Public Disclosure: Disclosure should be limited to platforms like the CAEP or SRO websites, given the challenges of ensuring the widespread dissemination, permanence, and authenticity of information distributed via social media.

Prohibited Acts and Enforcement:

Prohibited Acts: Similar to securities, "buying and selling" (including exchange and in-kind contributions) is prohibited. Furthermore, the original acquisition of newly issued crypto assets (limited to paid acquisition) should also be prohibited.
Exemptions: Besides exemptions similar to those for securities, an exemption is proposed if the actor can prove that the transaction was executed without knowledge of the material fact, accounting for the fact that evidence of knowledge is often difficult to obtain.
Penalties and Enforcement: Penalties similar to those for securities insider trading should be established. The SESC should be given investigative powers for criminal violations and the authority to impose administrative monetary penalties (surcharges).

2.8.2. Other Unfair Trading Regulations

Other forms of unfair trading, such as market manipulation (price rigging), should also be regulated. Such behavior, along with unique unfair practices specific to crypto assets (e.g., those occurring on unregistered platforms), may be addressed by general prohibition rules against unfair practices or fraudulent schemes.

Given the anonymity and global nature of crypto assets, immediately suppressing all related unfair practices is challenging. The FSA will monitor international trends and consider additional measures if specific, repeated cases of unfair trading necessitate stronger, categorical deterrents.

2.8.3. Surcharge System and Other Enforcement

Surcharge System: A surcharge system similar to that for unfair trading of listed securities should be established for insider trading and other unfair practices related to crypto assets.
Market Monitoring: Market monitoring systems, including transaction review by CAEPs and SROs, must be fundamentally strengthened.
Investigative Powers: The SESC should be granted full investigative powers for unfair trading, including those related to crypto assets, and powers to investigate the imposition of surcharges.
International Cooperation: Regulations for investigation cooperation with foreign regulatory authorities (similar to FIEA Article 189) should be established, based on reciprocity.

Conclusion

The 5th Working Group meeting solidified the commitment to integrate crypto asset regulation into the FIEA framework, focusing heavily on enhancing information disclosure and market integrity. The discussions acknowledged the limitations of regulatory control over a global, decentralized market while stressing the need for robust domestic standards, especially concerning central oversight and the mitigation of risks associated with unregistered and fraudulent activities.

The next steps will focus on refining the legislative language based on the agreed-upon direction, including the specifics of the proposed exemptions, the implementation details of the new business regulations, and the precise boundaries of insider trading regulation.