Japan's FSA Plans Mandatory Hack-Loss Reserves for Exchanges to Protect Crypto Users

Japan’s Financial Services Agency is preparing to implement one of the most significant changes in crypto regulation since the Mt. Gox collapse. They are mandating that all licensed exchanges keep dedicated liability reserves to pay back customers for losses from hacking incidents and unauthorized access.

This arrangement helps to bring crypto platforms closer to the safety standards already required of traditional securities firms.

According to the Nikkei, the FSA will shortly introduce legislation to parliament, most likely in 2026, requiring exchanges to set up liability reserves to cover losses from unapproved access. The plan is anticipated to be formally proposed by Japan’s Financial System Council, signalling a watershed moment in how regulators respond to the growing threat of exchange hacks.

A Response to Repeated Breaches

The proposed regulation comes as Japan’s crypto ecosystem continues to reel from a series of severe security breaches that have undermined retail investor confidence. One of the most notorious was the 2014 Mt. Gox hack, where 850,000 BTC was lost, pushing the exchange into bankruptcy, with repayments only beginning in 2024 and now extending through October 2026.

In May of last year, DMM Bitcoin lost 4,502 BTC (worth about $305 million) after North Korean hackers breached an employee account at Ginco, the wallet software provider responsible for the exchange’s transaction management. The DMM Bitcoin hack was particularly instructive for regulators, as it revealed how third-party vulnerabilities can compromise supposedly secure infrastructure.

Just last month, hackers stole about $21 million in Bitcoin and other cryptocurrencies from addresses tied to SBI Crypto, the mining pool owned by SBI Group. Investigation into the SBI incident revealed similarities to previous North Korean attacks, as well as laundering activity through Tornado Cash.

While current rules demand exchanges to maintain cold wallet storage, they lack provisions for rapid customer compensation when incidents occur. Japan’s regulators are now addressing this gap by enforcing stricter oversight of all service providers and mandating compensation mechanisms.

Japan’s Cryptocurrency Exchange Market Forecast; Source: imarc

The Japanese crypto market is seeing growing adoption and investments; as such, for traders in this sector, the implications are profound. Investors who buy crypto and conduct other trading activities on regulated exchanges in the country will soon have substantially stronger protections in the event of a breach.

Recent incidents highlight the persistent risks faced by retail investors, and the FSA’s move to require mandatory reserves signals an acknowledgment that such protections are crucial for sustaining investor confidence.

Modeling Traditional Finance Protections

The proposed framework draws directly from protections long established in Japan’s securities industry. Reserve amounts would be modeled on securities firms, which currently hold ¥2 billion to ¥40 billion (approximately $12.7 million to $255 million) depending on trading volumes.

Regulators hope to establish uniform rules for investor protection across asset classes by applying this proven methodology from traditional finance into the cryptocurrency industry.

Under the new regime, crypto exchanges would be required to maintain these reserves as a financial buffer, a ring-fenced pool of capital available exclusively for compensating customers when incidents occur.

There won’t be any need to depend on the government’s emergency intervention or prolonged bankruptcy proceedings, because affected users would receive reimbursement directly from the exchange’s liability reserve.

The framework additionally consolidates requirements, permitting customer assets to be kept separate from a platform’s own finances, thus making it easier for an independent administrator to refund assets to consumers if the exchange goes bankrupt.

Flexibility Through Insurance

The FSA is considering letting exchanges buy insurance instead of keeping all their reserves in cash. This approach would allow platforms to transfer some of the risk to specialized insurance companies and still keep minimum cash buffers.

The insurance option could be essential for keeping Japan’s crypto exchange market competitive. A rule to hold billions in reserves could shut out smaller platforms. The FSA’s goal in authorising insurance arrangements is to maintain market diversity and strengthen the overall level of safety across the entire industry.

For traders who want to sell Ethereum or manage volatile positions, the fact that exchanges must have enough reserves or insurance gives a clear incentive for platforms to stay financially stable and operational.

Closing the Cold Wallet Loophole

Currently, Japanese exchanges that hold customer assets in offline cold wallets have no obligation to maintain separate compensation reserves, a legislative gap that recent breaches have exposed as inadequate. The new structure negates this exemption entirely. Secure storage will no longer replace essential reserves; rather, the two safeguards will work in unison.

This is a fundamental shift in how Japanese regulators view exchange safety, moving from passive security measures to active compensation mechanisms. According to Decrypt, this strategy is a component of Japan’s larger attempt to improve standards after years of severe exchange failures.

Expanded Third-Party Oversight

Beyond reserve requirements, the FSA is also tightening oversight of third-party service providers that handle wallet infrastructure and trading systems. Any third-party custodian or trading management provider will need to obtain formal approval before servicing exchanges. This move responds directly to security gaps revealed by recent incidents.

This regulatory extension underscores that exchanges cannot outsource security responsibility without accountability. By forcing all custody and trading management firms to register with the FSA and adhere to explicit capital and governance rules, regulators have filled gaps where important operations previously concealed outside the regulatory perimeter.

Opportunities in the New Regulatory Environment

As Japan makes exchange requirements stricter, the ecosystem is attracting greater attention from platforms that offer alternative services. For investors interested in exploring different ways to get involved with crypto, platforms like Digitap provide access to multiple trading options alongside chances to earn crypto rewards through participation programs.

The shift toward mandatory reserves actually strengthens the reason for engaging with the crypto ecosystem in a diversified way; users can now feel more confident about exchange failures not resulting in a total loss.

Conclusion: Timeline and Implications

The FSA is preparing to introduce a bill to parliament during the 2026 legislative session, with implementation likely starting later that year. If enacted, exchanges will have a transitional period to build up reserve funds before full compliance is required.

This development marks a departure in regulatory strategy as Japan is moving from simply reacting to crises to proactively designing safety into the system before a catastrophe occurs. While we wait to see if other countries will follow Japan’s lead, this framework offers a powerful model for bringing institutional-level protections to everyday crypto users.

As rules become stricter in Japan and globally, platforms that offer transparent fees, strong customer protections, and compliant crypto solutions, such as Digitap, may see increased adoption.