The term "virtual currency" was officially replaced with "crypto assets" in Japan under the revised Act on Settlement of Funds in 2020. Since then, entities engaging in crypto-related services — including exchanges and custodians — must comply with strict regulatory requirements similar to traditional financial institutions.
As digital assets gain mainstream adoption, demand for secure crypto custody services has surged. Wallet providers and platforms offering management and storage solutions are now integral to the ecosystem. But what rules apply to these custodial businesses? And how does Japanese law define their obligations?
This article explains what crypto asset custody entails and outlines the legal framework governing crypto exchanges and custodians under Japanese regulations.
What Are Crypto Assets (Previously Called Virtual Currencies)?
Under Japan’s Act on Settlement of Funds, crypto assets are defined by three key characteristics (Article 2, Paragraph 5):
A property value that:
- Can be used to pay an unspecified party and exchanged for legal tender (e.g., JPY, USD)
- Can be electronically recorded and transferred
- Is not legal tender or denominated in fiat currency
- Can be exchanged with unspecified parties for the property value described in point 1
- Is not a representation of an “electronic recorded transfer right” as defined under the Financial Instruments and Exchange Act
Note: "Electronic recorded transfer rights" refer to blockchain-based securities tokens, such as digital representations of trust beneficiary rights or investment units in collective investment schemes.
Crypto assets serve dual roles — as payment methods and investment vehicles. The former falls under the Act on Settlement of Funds, while the latter is regulated by the Financial Instruments and Exchange Act.
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What Is Crypto Asset Custody?
In finance, "custody" refers to the safekeeping of securities or valuable assets. In the context of digital assets, crypto custody means managing crypto assets on behalf of others as a business activity.
This includes providing wallet systems where users store, send, or receive cryptocurrencies. Even if a company doesn’t operate an exchange, offering such services may still classify it as a regulated entity.
Since the 2020 amendment to Japan’s Act on Settlement of Funds, custody of crypto assets is explicitly included within the definition of “crypto asset exchange business” (Article 2, Paragraph 7). The law defines this business as involving:
- Buying, selling, or exchanging crypto assets
- Acting as an agent, broker, or intermediary for such transactions
- Managing users’ funds related to these activities
- Managing crypto assets for others — i.e., custody services
Therefore, any entity conducting custody operations must register as a crypto asset exchange operator with Japan’s Financial Services Agency (FSA) and comply with comprehensive regulatory obligations.
Key Regulatory Requirements for Crypto Exchange Operators
Even businesses focused solely on custody fall under Japan’s crypto regulatory regime. Below are the core compliance requirements applicable to all registered crypto exchange operators.
1. Advertising and Marketing Rules
Crypto businesses must include specific disclosures in all promotional materials (Cabinet Office Ordinance Article 18, based on Article 63-9-2 of the Act):
- Legal name and registration number as a licensed crypto exchange
- Clear statement that crypto assets are not legal tender
- Warning that price volatility can lead to financial loss
- Notice that crypto payments require recipient consent
Additionally, the following practices are strictly prohibited (Article 63-9-3):
- Misleading or false claims about crypto assets
- Promoting crypto purchases primarily for speculative profit rather than utility
- Any action that undermines user protection or market integrity
These rules aim to prevent aggressive marketing tactics and ensure transparency.
2. User Protection Measures
Operators must provide clear information about:
- The nature of crypto assets
- Terms and risks associated with usage
- Internal systems ensuring fair and accurate service delivery
They must also establish robust governance frameworks to safeguard users and maintain operational reliability.
3. Safeguarding User Assets
To protect against theft or insolvency, several asset protection mechanisms are mandatory.
Trust Management of User Funds
User fiat deposits must be segregated from company funds and placed in trust with a licensed trust institution (Article 63-11, Paragraph 1). This ensures that even in bankruptcy, customer money remains recoverable.
Separate Management of Crypto Assets
User-held crypto must be kept separate from corporate holdings. Furthermore, these assets must be managed using high-security methods, such as:
- Storing private keys in offline devices (cold wallets)
- Implementing multi-signature authentication
- Limiting network exposure
However, up to 5% of total user crypto holdings (by JPY value) may be held in hot wallets for operational efficiency — provided appropriate security controls are in place.
Holding Guarantee Crypto Assets
Since hot wallet assets are more vulnerable, operators must hold equivalent amounts of the same crypto type — known as "guarantee crypto assets" — in cold storage (Article 63-11-2).
These reserves act as collateral to cover potential losses from hot wallet breaches.
Priority Repayment Rights
In case of insolvency, users have priority claims over both:
- Their segregated deposited crypto assets
- The operator’s guarantee crypto assets
This prioritization significantly enhances investor protection compared to unsecured creditors.
Other Compliance Obligations
Beyond custody-specific rules, registered operators must comply with anti-money laundering (AML) laws under the Act on Prevention of Transfer of Criminal Proceeds, including:
- Conducting and recording KYC (Know Your Customer) checks
- Maintaining detailed transaction logs
- Reporting suspicious activities to the FSA
Failure to meet these standards can result in penalties, suspension, or revocation of registration.
Can You Avoid Crypto Exchange Registration?
Given the high compliance burden — including minimum capital requirements (over ¥10 million JPY) and robust operational infrastructure — many pure custody providers seek alternatives to full registration.
According to official FSA commentary:
“If a service provider only holds part of a user’s private key and cannot unilaterally initiate transfers, it is generally not considered to be ‘managing crypto assets for others’ under Article 2(7)(iv). Similarly, if private keys are encrypted and the provider lacks decryption capability, even full key possession does not constitute active management.”
This means that non-custodial or multi-party control models — such as:
- Shared custody with user-held key fragments
- Encrypted key storage without access to decryption keys
— may fall outside the scope of mandatory registration.
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Frequently Asked Questions (FAQ)
Q: Is every crypto wallet provider considered a regulated exchange in Japan?
A: No. Only those who have full control over users’ private keys or can independently transfer assets are classified as exchange operators requiring FSA registration.
Q: What happens to user funds if a registered exchange goes bankrupt?
A: User fiat deposits held in trust and segregated crypto assets (including guarantee reserves) are protected and eligible for priority repayment.
Q: Can a company offer crypto custody without registering as an exchange?
A: Yes — if the business model ensures that the provider cannot unilaterally move user funds, such as through split-key or encrypted key systems.
Q: Are stablecoins considered crypto assets under Japanese law?
A: Yes, most stablecoins qualify as crypto assets unless they represent regulated financial instruments like e-money or securities tokens.
Q: How often do exchanges undergo audits in Japan?
A: Registered operators must submit regular reports and are subject to periodic inspections by the FSA to ensure ongoing compliance.
Q: What penalties exist for non-compliant custody services?
A: Unregistered operators face administrative sanctions, fines, or criminal charges. Users also lose statutory protections like priority repayment rights.
Conclusion: Navigating Crypto Custody Regulation in Japan
Providing crypto custody services in Japan places a business within the scope of regulated crypto exchange operators — triggering registration mandates and stringent user protection rules. However, through careful design — particularly by limiting unilateral control over private keys — companies can potentially operate outside this framework.
While each case depends on specific technical and operational details, strategic structuring can help avoid unnecessary regulatory burdens.
For accurate legal assessment of your business model’s compliance status, consult a law firm experienced in crypto asset regulation.