**Japan Plans Tough New Rules for Crypto Exchanges: What Liability Reserves Actually Mean**

The Japanese government is set to introduce significant changes to cryptocurrency regulation, requiring exchanges to maintain dedicated funds to compensate customers in the event of security breaches.

The Financial Services Agency (FSA) plans to introduce new rules requiring all registered cryptocurrency exchanges to hold liability reserves. These reserves will be used to repay customers if assets are lost through unauthorized transfers. The requirement will apply even to funds kept in cold wallets, ending the previous assumption that offline storage alone provides sufficient protection.

The measures aim to bring the cryptocurrency sector closer to the strict standards applied to traditional financial institutions in Japan, one of the world's most heavily regulated markets. As of December 9, 2025, under the Payment Services Act, registered cryptocurrency exchanges in Japan must comply with strict requirements, including asset custody, accounting, separation of client funds, Anti-Money-Laundering (AML) controls and cold storage rules.

However, there is still no legal obligation for exchanges to hold dedicated funds to compensate customers after a hack or unauthorized outflow. The FSA and its advisory Financial System Council have concluded that this gap in protection needs to be closed.

**What the Proposed Liability Reserve Rules Require**

The new rules will require exchanges to maintain dedicated funds to compensate customers in the event of security breaches, including hacking incidents and unauthorized transfers. According to a report in The Nikkei, the draft legislation will require all registered cryptocurrency exchanges to hold liability reserves.

These reserves will be used to repay customers if assets are lost through unauthorized transfers. The requirement will apply even to funds kept in cold wallets, ending the previous assumption that offline storage alone provides sufficient protection.

**Benchmarking Reserves to Japan's Securities Industry Rules**

The FSA plans to base the size of these reserves on standards already used for securities firms in Japan. Traditional securities companies must maintain reserves ranging from 2 billion to 40 billion Japanese yen, depending on their size, risk profile and activity level.

**Insurance May be Allowed as an Alternative**

To reduce the burden on smaller operators, the FSA is considering allowing exchanges to meet some or all reserve requirements through approved insurance policies instead of holding only cash or liquid assets. Details such as acceptable policy types, minimum coverage levels and approved insurers are still under discussion.

**Liability Reserve is Part of a Wider Regulatory Overhaul**

The liability reserve rule is only one part of a broader set of reforms. Other proposed changes include:

• Requiring third-party wallet providers, custodians and trading system operators to register with regulators.
• Reclassifying certain cryptocurrencies under the Financial Instruments and Exchange Act would impose stricter securities-style rules, such as audits and disclosure requirements.
• Improving insolvency procedures so that customers can receive compensation more quickly, potentially from liability reserves or insurance.

**Why Regulators are Pursuing this Framework**

The primary goals are stronger customer protection, greater market confidence and the elimination of remaining regulatory weaknesses:

• Boosting customer protection: Hacking incidents and subsequent repayment delays have shown the need for faster compensation mechanisms. Liability reserves will ensure that exchanges have funds immediately available instead of forcing customers to wait through lengthy bankruptcy proceedings.
• Restoring and maintaining market trust: Japan is working to align cryptocurrency rules more closely with those of the securities industry. With this policy, the country aims to position itself as a secure jurisdiction for digital assets and offset the reputational risk created by past high-profile hacking incidents.
• Closing regulatory gaps: Cold wallet requirements reduce the risk of attack but do not remove it entirely. The new reserves add a second layer of protection that focuses on financial recovery after an incident rather than only on prevention.

**The Changes Will Affect Exchanges, Customers and the Wider Market**

The changes will affect exchanges, customers and the wider market in several ways:

• Higher operating costs due to the need to hold substantial reserves or pay for insurance
• Difficulty for smaller exchanges to meet the requirements, which may lead to industry consolidation
• Additional accounting, reporting and compliance procedures

**Impact on Customers**

Greater protection against losses caused by exchange failures. Faster compensation in the event of hacks due to the dedicated financial buffer.

**Impact on the Broader Market**

Japan's approach may influence regulatory developments in other countries. Exchanges worldwide are likely to adopt more professional custody and risk management practices.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision. While we strive to provide accurate and timely information, Cointelegraph does not guarantee the accuracy, completeness, or reliability of any information in this article. This article may contain forward-looking statements that are subject to risks and uncertainties. Cointelegraph will not be liable for any loss or damage arising from your reliance on this information.