Japan's Financial Regulator Releases On-Site Inspection Results for Crypto Exchanges

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The Japanese Financial Services Agency (FSA) has unveiled the findings of its on-site inspections of cryptocurrency exchanges, signaling a strengthened approach to regulatory oversight in the country’s rapidly evolving digital asset landscape. The move underscores Japan’s commitment to investor protection and market integrity as the crypto sector continues to grow.

Strengthening Oversight for Exchange Licensing

Following the comprehensive review, the FSA announced it will implement stricter supervision for new cryptocurrency exchange applications seeking formal operational licenses. Under the updated framework, newly registered exchanges will undergo mandatory on-site inspections during their initial phase. These evaluations will focus on assessing the viability and robustness of their business models, internal controls, and compliance infrastructure.

Currently, “hundreds” of companies are reportedly awaiting review, highlighting the growing interest in Japan’s regulated crypto market. The FSA emphasized that this enhanced scrutiny is essential to ensure only well-structured and compliant platforms gain access to the financial system.

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Rapid Market Growth Outpaces Internal Controls

One of the key findings from the FSA’s report is that many exchange operators have failed to scale their internal control systems in line with explosive transaction volume growth. This gap became particularly evident during the cryptocurrency market surge in late 2017.

Digital asset holdings across domestic exchanges skyrocketed to 792.8 billion yen (approximately $7.1 billion), marking a sixfold increase within just one year. Alarmingly, the majority of these platforms operate with fewer than 20 employees. This means that, on average, each employee is responsible for managing digital assets worth around 3.3 billion yen ($29.7 million)—a staggering responsibility that raises serious operational risk concerns.

The FSA identified significant shortcomings in several core areas:

These vulnerabilities highlight the urgent need for stronger institutional safeguards within Japan’s crypto ecosystem.

AML Compliance Emerges as Critical Concern

A major area of regulatory concern is the inadequacy of anti-money laundering (AML) measures at certain exchanges. The FSA stressed that weak AML controls not only expose platforms to financial crime risks but also threaten the legitimacy of the entire digital asset industry.

Effective AML procedures are now a cornerstone of the licensing process, requiring exchanges to demonstrate rigorous customer due diligence, transaction monitoring, and suspicious activity reporting capabilities.

Regulatory Timeline: Key Developments in 2025

Japan has been actively refining its crypto regulatory framework throughout 2025:

These developments indicate a proactive stance by Japanese authorities to stay ahead of emerging risks while fostering innovation within a secure environment.

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Industry Self-Regulation Gains Momentum

In parallel with government efforts, self-regulation is gaining traction through the Japan Virtual Currency Exchange Association (JVCEA), established in early March. The JVCEA works collaboratively with the FSA to develop industry standards and promote responsible trading practices.

Last month, the association proposed that its members impose maximum trading limits on certain clients—a move aimed at curbing speculative behavior and enhancing market stability. This initiative reflects a growing recognition among industry players that sustainable growth depends on trust, transparency, and accountability.

FAQs: Understanding Japan’s Crypto Regulatory Landscape

Q: Why did the FSA pause new exchange registrations?
A: The registration process was effectively halted after the January 2018 Coincheck hack, which resulted in the loss of approximately $532 million in cryptocurrencies. The pause allowed regulators time to strengthen oversight mechanisms and prevent future security breaches.

Q: What are the main risks identified by the FSA in its inspection?
A: The primary risks include insufficient internal controls, inadequate staffing relative to asset规模, poor risk management, weak corporate governance, and deficient anti-money laundering (AML) procedures.

Q: How does Japan’s approach compare to other G20 nations?
A: Japan is considered one of the more progressive yet cautious regulators among G20 countries. It was an early adopter of crypto exchange licensing but has since tightened rules in response to security incidents and market volatility.

Q: Are privacy coins banned in Japan?
A: While not outright banned, trading in privacy-focused cryptocurrencies is now subject to strict restrictions under new FSA guidelines aimed at preventing illicit financial activity.

Q: What role does JVCEA play in regulation?
A: The Japan Virtual Currency Exchange Association serves as a self-regulatory body that collaborates with the FSA to set industry standards, conduct audits, and promote best practices among member exchanges.

Q: Is Japan still open to new crypto businesses?
A: Yes, but under rigorous conditions. Companies must meet high compliance, security, and operational standards before being granted a license to operate legally in Japan.

Moving Forward: Balancing Innovation and Protection

As Japan continues to refine its regulatory approach, the focus remains firmly on balancing innovation with investor protection. The FSA’s recent actions send a clear message: while digital assets are welcome in Japan’s financial ecosystem, they must operate within a framework of accountability and transparency.

For global market participants, Japan’s model offers valuable insights into how effective crypto regulation can be implemented—combining government oversight with industry collaboration to build a resilient and trustworthy market.

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Core Keywords:

This structured evolution of policy and practice positions Japan as a leader in responsible digital finance innovation—one where safety, compliance, and technological advancement go hand in hand.