Japan to Classify Cryptocurrencies as Financial Products by 2026

Japan is set to make a significant regulatory move in the cryptocurrency space. The Financial Services Agency (FSA) is planning to revise its financial laws to officially classify cryptocurrencies as financial products as early as 2026, according to a recent report by local news outlet Nikkei.

The move aims to bring cryptocurrencies under the same rules that govern traditional financial assets, including the laws surrounding insider trading. If passed, the new regulations would create a legal framework that would require companies dealing with cryptocurrencies to register with the FSA. However, the regulations are expected to treat cryptocurrencies separately from traditional securities like stocks and bonds.

A New Regulatory Framework for Cryptocurrencies

The FSA’s proposed changes are expected to be submitted to Japan’s parliament as early as next year, following a series of internal study groups that have been reviewing the issue. The new framework would likely prohibit trading based on insider information, which is already prohibited in other financial markets such as stocks. This would give cryptocurrencies a formal status under the country’s Financial Instruments and Exchange Act, effectively subjecting them to the same rules as other financial products.

While the finer details of the legislation are still being finalized, the regulation would not treat cryptocurrencies as securities. Instead, the assets would fall into a separate category, possibly reflecting their unique nature in comparison to more traditional financial products.

One significant aspect of the proposed changes is that the FSA plans to enforce these new rules for cryptocurrency companies regardless of whether they operate within Japan. However, it remains unclear how the regulations would apply to overseas entities that engage in cryptocurrency transactions involving Japanese residents or markets.

Challenges in Defining Cryptocurrencies

As part of the regulatory overhaul, Japan’s financial authorities will also have to decide which cryptocurrencies will be classified under the new framework. Bitcoin (BTC) and Ether (ETH) are likely to be treated differently from more speculative, high-risk tokens like memecoins, given their established status as widely traded assets. The challenge lies in drawing clear distinctions between these different types of cryptocurrencies, as well as in deciding how to regulate less liquid, riskier assets.

Japan's Growing Crypto-Friendly Stance

This move to classify cryptocurrencies under the existing financial framework comes amid a broader shift in Japan’s stance toward cryptocurrency regulation. The Japanese government and financial regulators have recently taken steps to embrace the growing crypto sector. For instance, earlier this month, Japan issued its first license allowing a company, SBI VC Trade, to deal with stablecoins. The license covers Circle’s USDC, one of the most popular stablecoins in the market.

Additionally, the Liberal Democratic Party (LDP) has moved forward with reforms aimed at reducing the capital gains tax on cryptocurrencies from 55% to 20%. These measures align with Japan’s broader goal of positioning digital assets as a distinct asset class within the country’s financial ecosystem.

In February, reports also surfaced that the FSA was considering lifting its ban on crypto-based exchange-traded funds (ETFs). The move would bring Japan’s regulatory stance on ETFs in line with that of Hong Kong, which approved crypto ETFs for trading in April 2024.

Conclusion

Japan’s proposed changes to its financial laws represent a significant shift in how the country is approaching cryptocurrency regulation. By classifying digital assets as financial products and extending insider trading regulations to include crypto, Japan aims to create a clearer and more structured regulatory environment for the industry. The shift also highlights the country's growing acceptance of cryptocurrencies and its commitment to ensuring that digital assets are integrated into the global financial system with appropriate oversight.

As Japan continues to evolve its stance on cryptocurrencies, the next few years we could see significant regulatory and tax reforms that shape the future of the crypto industry in Asia and beyond.