Japan reclassifies digital assets as financial instruments

Japan’s government has approved amendments to its Financial Instruments and Exchange Act (FIEA) that would classify digital assets as financial instruments and ban insider trading based on non-public information, according to a report by local outlet Nikkei.

The updated legislation, approved by Prime Minister Sanae Takaichi’s Cabinet, moves digital asset regulation from its current position under the Payment Services Act (PSA) to be governed by the FIEA, which is the regulatory framework for securities markets, issuance, trading, and disclosures.

The change is the result of an extensive review of how Japan regulates digital assets, conducted by the Financial System Council (FSC)—the key consultative body that informs and guides Japan’s finance policy—from June to December 2025, which culminated in the Financial Services Agency (FSA), Japan’s top financial regulator, releasing a report on December 10 that recommended the reclassification.

The FSA previously considered digital assets were better accounted for by the PSA due to their potential use as a means of payment. However, due to the increased use of many digital assets for investment purposes, the FSA shifted its view to the FIEA being a more appropriate home.

Based on the FSA’s December proposals, on which the FIEA update appears to be based, non-fungible tokens (NFTs) and stablecoins will not be among the digital assets to be reclassified as financial instruments; the former because they’re associated with the provision of some goods or services, the latter because they have the potential to be widely used for remittance and payment purposes.

According to the Nikkei report, the updated FIEA will also strengthen penalties for non-compliance or misconduct, with prison sentences for unregistered sellers being increased from up to three years to up to 10 years, and fines raised from the current up to 3 million yen ($18,801) to up to 10 million yen ($62,672).

What the change means

Reclassification as financial instruments under the FIEA would subject digital assets and service providers to stricter, securities-style regulations compared to the PSA.

The FIEA establishes various business regulations governing mediation, intermediation, investment management, and investment advice related to the buying and selling of securities, as well as requiring the proper management of assets entrusted to customers.

In practice, among the specific new requirements that being under the FIEA would impose on digital asset service provider: exchanges would be required to provide pre-sale disclosures, including detailed information about the core entities behind the offering, and requires code audits by independent third-party experts; issuers would need to disclose their identities, regardless of whether the project is decentralized; and firms would face more rigorous licensing, capital, and compliance requirements.

The FIEA also regulates unfair trade practices, including the updated insider trading rules, to ensure a fair and transparent market, with criminal penalties and surcharge systems in place to ensure the effectiveness of these regulations.

“The FIEA is based on the concept of building a comprehensive investor protection framework covering a wide range of highly investment-oriented financial products,” said the FSA, when it released its recommendations last December. “The fact that many crypto asset transactions are conducted with the expectation of returns from price fluctuations aligns with the investment-oriented consideration of financial products that were discussed when the FIEA was enacted.”

If passed in the current session of the National Diet—the national legislature of Japan—the updated FIEA is expected to be implemented in fiscal year 2027, so digital asset firms operating in Japan must begin preparing for their new regulatory regime.

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