In order to guard against unapproved bitcoin withdrawals, the Financial Services Agency (FSA) will mandate that cryptocurrency exchanges set up liability reserves.
In the case of illegal access or other harm brought on by the bitcoin outflow, this will allow them to promptly reimburse clients for their losses. In the aftermath of several instances of unlawful outflows worldwide, this is meant to safeguard investors.
The orders ahead
After its next meeting on Wednesday, the Financial System Council, an advisory council to the Financial Services Agency (FSA), is expected to include the suggestion for bitcoin companies to set up liability reserve funds in a report.
A report will shortly be prepared by a working group of the Financial System Council, the Prime Minister’s advisory council, which has been investigating the laws governing virtual currencies. The establishment of liability reserves will also be included in the report.
Investor confidence may be greatly increased by putting the order to create liability reserves into practice. This would encourage more confidence in the local digital asset market and attract a wide variety of participants, including institutions and retailers.
The action was taken weeks after it was reported that the FSA was considering a change that would permit banks to own and trade digital assets like bitcoin.
It is anticipated that the Financial Instruments and Exchange Act would categorise cryptocurrencies as financial instruments when the FSA submits the modification to parliament in 2026.
If approved, exchanges will be subject to more stringent disclosure requirements, stronger custody audits, and prohibitions on insider trading, bringing crypto regulations closer to those of conventional securities businesses.
More moves from FSA
In order to lessen the cost of keeping sizable reserves, the FSA would also allow exchanges to buy insurance policies under the framework. If the exchange operator files for bankruptcy, a different system would be implemented to guarantee the repatriation of assets to clients.
User assets and corporate holdings would need to be kept apart by cryptocurrency exchanges. At the same time, a lawyer or court-appointed administrator would be authorised to disperse assets to users if the management team is no longer in charge of the platform.
The FSA of Japan is also making an effort to subject popular cryptocurrencies to the same regulations that govern stocks.
If the idea is implemented, 105 cryptocurrencies, including Bitcoin and Ethereum, would be categorised as “financial products” under the Financial Instruments and Exchange Act of Japan.