Regulatory Developments: Japan Mandates Liability Reserves for Exchanges

The Financial Services Agency in Japan is set to require cryptocurrency exchanges to maintain liability reserves, a move designed to enhance security and protect investors. This regulatory change is a response to the increasing number of hacks affecting global exchanges.

According to a report by Nikkei, the FSA will revise its requirements for local cryptocurrency companies to include strategies for swiftly compensating users impacted by security breaches or other unforeseen events.

The Financial System Council, which serves as an advisory body to the FSA, is expected to release a report on this matter following a meeting scheduled for Wednesday. One of the key recommendations is likely to mandate that crypto firms establish liability reserve funds.

This development underscores Japan's proactive approach to protecting its cryptocurrency users, particularly given that the country has a significant concentration of crypto enthusiasts, with approximately 12 million registered accounts as of February, according to FSA data.

Japan's total population stands at about 123 million. This regulatory update comes alongside the FSA's plans to evaluate regulations that would permit banks to purchase and hold crypto assets. In a related context, the fintech firm JPYC launched a yen-pegged stablecoin in October, which is backed one-to-one by bank deposits and government bonds.

Japanese regulators previously prohibited non-banking institutions from issuing stablecoins in 2022. However, the FSA indicated in August that it might approve the first yen-backed token by 2026. Major financial institutions in Japan, including Mitsubishi UFJ Financial Group, Bank Sumitomo Mitsui Banking Corp, and Mizuho Bank, launched a stablecoin issuance platform named Progmat in 2023 and are looking into creating their own tokens.

Monex Group is also considering the launch of a yen-pegged stablecoin. This regulatory shift reflects a broader global trend towards stricter oversight within the cryptocurrency industry, as authorities worldwide seek to enhance security measures and protect investors from potential risks.

The developments in Japan illustrate the country's commitment to maintaining a secure and robust cryptocurrency market.