Japan’s FSA Weighs New Registration Rules for Crypto Custodians and Service Providers

Core Insights - Japan's Financial Services Agency (FSA) is proposing new registration rules for crypto custodians and trading service providers to enhance oversight of the digital asset infrastructure [1][4][9] Regulatory Changes - A working group under the Financial System Council met to discuss the proposal, which mandates that all third-party custody and trading management firms register with regulators before offering services to crypto exchanges [3][4] - Exchanges will be required to use systems developed only by registered entities, addressing the current lack of similar regulations for external service providers [4][5] Security Concerns - The current framework requires crypto exchanges to safeguard deposits, but external service providers are not subject to the same rules, creating security vulnerabilities [5][9] - The urgency for these changes was highlighted by the DMM Bitcoin hack in 2024, where 48.2 billion yen ($312 million) worth of Bitcoin was stolen, exposing weaknesses in outsourced service oversight [5][6] Support for New Regulations - Most members of the working group support the new registration system, emphasizing the need for clearer regulations in the growing crypto ecosystem [6] - The FSA plans to compile a formal report and submit proposed amendments to the Financial Instruments and Exchange Act during the 2026 ordinary Diet session [6] Broader Digital Finance Agenda - The initiative aligns with Japan's efforts to balance innovation and investor protection, as evidenced by the recent approval of the first yen-backed stablecoin, JPYC, and a stablecoin pilot project involving Japan's three largest banks [7][8]