Japan Strengthens DeFi Regulations — FSA's

📡 THE SIGNAL — What Happened

Why it matters: If Japan, the world's third-largest economy, introduces comprehensive regulations for DeFi, it will determine the direction of crypto asset regulation across Asia and have an irreversible impact on a multi-trillion yen market. The FSA's move is not merely a domestic issue; it could become a "template" for global DeFi regulation.

• Regulatory Trends — The FSA is considering introducing a new regulatory framework for DeFi projects in early 2026, with stricter KYC requirements and enhanced tax reporting obligations as key pillars.
• Market Size — The number of registered crypto asset exchanges in Japan is approximately 30, and the domestic crypto asset trading volume is estimated to reach approximately 20 trillion yen annually as of 2025.
• Tax System — In Japan, profits from crypto assets are subject to progressive taxation as miscellaneous income, with a maximum rate of 55%, and the industry's request for separate taxation (20%) has not yet been realized.
• International Comparison — Crypto-friendly jurisdictions such as Singapore, Dubai, and Switzerland are actively attracting DeFi projects, increasing the risk of talent and capital outflow from Japan.
• Technological Trends — Ethereum's DeFi TVL (Total Value Locked) is approximately $50 billion globally as of the end of 2025, with Japan-related projects accounting for less than 1%.
• Policy Background — Following the FTX collapse in 2022, Japanese regulators re-recognized the importance of customer asset protection and strengthened the justification for stricter regulation.
• Industry Trends — The Japan Cryptoasset Business Association (JCBA) and the Japan Virtual and Crypto Asset Exchange Association (JVCEA) are developing self-regulatory rules, but there are challenges in aligning them with the decentralized nature of DeFi.
• Politics — The Liberal Democratic Party's Digital Society Promotion Headquarters web3 Project Team has proposed crypto asset tax reform, but coordination with the Ministry of Finance is proving difficult.
• International Regulation — The EU's MiCA (Markets in Crypto-Assets) regulation will be fully enforced by the end of 2024, influencing Japan's regulatory design.
• Technical Challenges — Due to the inherently decentralized nature of DeFi protocols, applying traditional KYC/AML frameworks is technically difficult, and regulators are shifting their focus to front-end and on-ramp regulations.
• Market Reaction — Following reports of stricter regulation, trading volumes of Japan-based DeFi-related tokens temporarily decreased by 15-20%.
• Talent Trends — An industry survey indicates that approximately 30% of Japanese blockchain engineers are considering working or starting businesses in overseas jurisdictions.

To understand the current clash between Japan and DeFi regulation, it is necessary to overlay three contexts: Japan's historical DNA of financial regulation, its complex relationship with crypto assets, and global regulatory trends.

Japan's financial regulation was shaped by the collapse of the bubble economy in the 1990s and the "Lost Decade." Although the 1996 Financial Big Bang reforms aimed at deregulation, the subsequent failures of Yamaichi Securities and the nationalization of Long-Term Credit Bank led regulators to deeply internalize a culture that instinctively prioritizes "prevention of systemic risk" over "promotion of innovation." This tendency is etched into the FSA's organizational DNA, and its initial reaction to new financial technologies is always "how to manage the risks."

Regarding crypto assets, Japan was a "pioneer" in establishing a regulatory framework ahead of the world. The 2014 Mt. Gox incident was a shocking event where the then-largest Bitcoin exchange in the world collapsed in Tokyo, with approximately 850,000 BTC disappearing. This incident left a deep trauma on Japanese regulators, leading to the introduction of a registration system for crypto asset exchange businesses under the revised Payment Services Act in 2017. Japan became one of the first countries in the world to legally recognize Bitcoin as a "payment method."

However, this "curse of the pioneer" is at the root of the current problem. The 2017 regulatory framework was designed on the premise of centralized exchanges (CEXs) and did not anticipate the existence of DeFi protocols that operate without intermediaries via smart contracts. The 2018 Coincheck incident (where approximately 58 billion yen worth of NEM was stolen) further accelerated regulatory tightening, and the FSA imposed strict supervision on registered operators. As a result, Japan's crypto asset market became "the safest in the world, but the least innovative."

The explosive growth of DeFi since 2020 exposed the limitations of this regulatory framework. Protocols like Uniswap, Aave, and Compound function permissionlessly, without the need for traditional financial intermediaries. For Japanese regulators, this is a fundamental challenge, as the very premise of the registration system—namely, that "there is a regulated business operator"—is shaken.

The FTX collapse in 2022 paradoxically proved the legitimacy of Japan's regulatory approach. FTX Japan's customer assets were protected thanks to the segregated management mandated by Japanese regulations and were promptly returned, in contrast to overseas FTX users. This "success story" further solidified the FSA's path toward stricter regulation, reinforcing the internal narrative that "strict regulation is indeed necessary."

In a global context, the EU's MiCA regulation (fully enforced by the end of 2024), the US SEC's enhanced enforcement against crypto assets, and the strengthening of international AML/CFT standards (updates to FATF recommendations) are exerting external pressure on Japan's regulatory tightening. In particular, the strict application of FATF's Travel Rule (obligation to transmit sender and receiver information in crypto asset transfers) is creating fundamental incompatibility with DeFi protocols.

Simultaneously, the entry of global institutional investors into the crypto asset market since the approval of Bitcoin ETFs in the US in 2025 has also heightened interest in DeFi among Japanese financial institutions. As megabanks and major securities firms advance research into tokenized securities and stablecoins, the direction of regulation directly impacts their business strategies.

The current move towards stricter regulation is the inevitable consequence of these historical circumstances. The trauma of Mt. Gox and Coincheck, the "success story" with FTX, global regulatory trends, and the eagerness of traditional financial institutions to enter the market—amidst this complex interplay, the FSA, while wavering between "innovation" and "investor protection," has a structural tendency to prioritize the latter in accordance with its organizational DNA. The question is whether this tendency can produce appropriate regulatory design for DeFi, a fundamentally new paradigm.

The delta: With the FSA moving to introduce a comprehensive regulatory framework for DeFi, a turning point is arriving where DeFi projects, which have previously existed in a "regulatory gray zone," will be subject to clear legal obligations. This is not merely a tightening of regulations but a moment when the fundamental conflict between the concept of "decentralized finance" and the structure of "centralized regulation" becomes apparent, and its outcome will determine the direction of the crypto asset ecosystem not only in Japan but across Asia.