In a decisive move to bolster its digital asset security and investor protection, Japan has enacted a comprehensive cryptocurrency law following one of the country’s largest crypto exchange hacks. The legislation comes on the heels of the May 2024 breach at DMM Bitcoin, a Japan-based exchange, where hackers stole approximately 4,502.9 bitcoins, valued at nearly $305 million at the time. The high-profile attack, attributed to the North Korea-linked TraderTraitor group by both the FBI and Japan’s National Police Agency, shook investor confidence and highlighted glaring vulnerabilities in the system.
In response, Japanese authorities have introduced a robust legal framework aimed at increasing oversight, ensuring customer asset security, and regulating the use of stablecoins and in-app crypto payments. This law is part of Japan’s broader strategy to protect its growing crypto user base and maintain its status as a responsible, innovation-friendly economy.
Mandatory Domestic Storage of Customer Assets
One of the cornerstone provisions of the new law mandates that all crypto exchanges operating in Japan must store customer assets within the country. This measure is designed to protect Japanese users from the repercussions of foreign platform collapses or insolvency. By keeping customer funds domestically, regulators can act more swiftly in case of crises, ensure proper legal jurisdiction, and enhance monitoring.
This change is a direct response to concerns that many exchanges, especially those headquartered overseas, may not always follow strict compliance protocols. It’s also a pre-emptive step to reduce the impact of situations like the collapse of FTX, which left global users struggling to recover their funds due to jurisdictional complexities.
Stronger AML Measures and Regulation of Stablecoins
The new legislation also introduces tighter anti-money laundering (AML) standards to curb the misuse of cryptocurrencies in illicit financial activities. Under these rules, exchanges must comply with more rigorous Know Your Customer (KYC) procedures and transaction monitoring practices. This not only brings Japanese crypto regulation more in line with global standards but also helps to prevent crypto being exploited for money laundering and fraud.
Additionally, the law sets new rules for stablecoins, cryptocurrencies pegged to fiat currencies like the yen or US dollar. These rules ensure stablecoins are issued and managed by entities that meet strict security and operational guidelines. This is critical as stablecoins increasingly serve as a bridge between traditional finance and digital assets.
Legal Recognition of In-App Crypto Payments
In a significant step towards crypto adoption, the legislation now allows for cryptocurrencies to be used for in-app purchases and services. This makes crypto spending more practical and user-friendly in everyday applications, particularly in gaming, digital services, and e-commerce platforms. By legitimising crypto for such use cases, Japan is encouraging innovation while ensuring transactions are secure and regulated.
This legal recognition could stimulate wider crypto usage across digital ecosystems and provide new business models for app developers and platforms eager to integrate blockchain technology into their offerings.
The Road Ahead for Japan’s Crypto Market
Following the DMM Bitcoin debacle, the company pledged to refund users but later opted to shut down operations altogether. Its users and assets are currently being transferred to SBI VC Trade, with full migration expected by March 2025. This incident served as a wake-up call and likely accelerated regulatory action.
Japan’s new crypto law reflects a mature and responsive approach to digital asset governance. By addressing vulnerabilities, improving legal clarity, and fostering legitimate use cases, the legislation aims to rebuild trust and provide a safer environment for crypto investors. It also reinforces Japan’s position as a global leader in creating secure, innovation-friendly digital finance ecosystems.
