7.88 million users beware! Japan cracks down on insider trading of Crypto Assets with severe penalties similar to the stock market.

The Securities and Exchange Surveillance Commission (SESC) of Japan is set to gain statutory powers to investigate and punish insider trading in crypto assets. The new regulations will apply the same standards as the stock market, imposing heavy penalties based on profit amounts and allowing for criminal prosecutions. This regulatory revolution affects 7.88 million crypto users in Japan, with the Financial Services Agency expecting to complete framework discussions by the end of 2025 and submit amendments in 2026.

Japan Takes a Key Step in Cracking Down on Crypto Assets Insider Trading

(Source: Nikkei Asia)

Japan's financial regulatory system is undergoing a profound transformation. According to a report by Nikkei Asia on October 14, the Japan Securities and Exchange Surveillance Commission will be authorized to investigate suspicious Crypto Assets trading activities and impose fines based on the amount of profit gained by violators from insider trading. For more serious cases, the securities regulatory authority will also file criminal charges, marking a significant increase in Japan's efforts to combat insider trading in Crypto Assets, comparable to those in the traditional stock market.

This policy shift did not occur suddenly. In recent years, Japan's cryptocurrency market has experienced explosive growth, with the number of local cryptocurrency users quadrupling in five years, from less than 2 million to 7.88 million, accounting for about 6.3% of Japan's total population. This vast user base has created a market worth hundreds of billions of yen, but it has also exposed serious issues arising from a regulatory vacuum. Currently, the rules on insider trading for cryptocurrencies are not covered under the Financial Instruments and Exchange Act (FIEA), and the self-regulatory organization, the Japan Virtual and Crypto Assets Exchange Association, lacks an effective monitoring system to detect suspicious transactions.

Under the current system, even if exchanges detect suspicious insider trading activities, they lack the legal tools to conduct in-depth investigations or impose substantial penalties. This regulatory loophole not only harms the rights of ordinary investors but also hinders institutional funds from entering the Japanese Crypto Assets market. Many professional investors are concerned about the lack of fairness in the market; in an environment without clear insider trading regulations, individuals with access to non-public information can easily profit, while retail investors become the victims.

New Regulatory Framework and Enforcement Challenges

As the parent organization of SESC, the Financial Service Agency (FSA) will discuss the details of the regulatory framework through working groups before the end of 2025, with the goal of submitting a proposed amendment to the Financial Instruments and Exchange Act to Congress in 2026. Once approved, Japan will have a complete legal basis for combating insider trading in Crypto Assets, and SESC will become the enforcement sword in the Crypto Assets market.

The new regulations will grant the SESC extensive investigative powers. Regulatory authorities can request exchanges to provide transaction records, trace the flow of funds, and investigate the actual controllers behind suspicious accounts. The penalty mechanism will refer to existing standards in the stock market, calculating fines based on a multiple of the profits gained from insider trading. For example, if someone profits 10 million yen from insider trading, they may face fines several times this amount. For repeat offenders or cases of particularly serious circumstances, the SESC will also refer the matter to the prosecutorial authorities for criminal prosecution, and violators may face imprisonment.

However, law enforcement practices will face unprecedented challenges. According to a report by Nikkei Asia, Japanese regulatory agencies have very limited experience in handling insider trading cases related to Crypto Assets. In the traditional stock market, the definition of insider trading is relatively clear: directors, executives, or individuals with significant undisclosed information of a listed company engaging in trading before the information is made public constitutes a violation. However, in the world of Crypto Assets, many tokens lack identifiable issuers, project teams may operate anonymously, or even adopt a fully decentralized governance structure.

This particularity brings about fundamental questions: Who qualifies as an “insider”? When a Decentralized Autonomous Organization (DAO) decides to make a significant protocol upgrade, do all the hundreds of community members participating in the vote count as insiders? When a developer submits a code update on GitHub, do these publicly available but not widely noticed pieces of information count as insider information? These questions have no precedent in traditional financial regulations and require regulatory agencies to gradually explore answers in practice.

Strategic Intent of FSA to Promote Regulatory Integration

The FSA's ambition for the regulation of Crypto Assets goes beyond just combating insider trading. In early September this year, the FSA attempted to shift the regulation of Crypto Assets from the Payment Services Act to the Financial Instruments and Exchange Act, which is a strategic adjustment of far-reaching significance. The Payment Services Act primarily focuses on the function of Crypto Assets as a payment tool, with regulatory emphasis on anti-money laundering and consumer protection. In contrast, the Financial Instruments and Exchange Act is the core law governing the securities market, encompassing a complete regulatory framework that includes information disclosure, investor protection, and prevention of market manipulation.

The FSA stated that this change can address common investment issues in the Crypto Assets market, including inaccurate information disclosure, unregistered illegal operations, fraudulent activities, and security vulnerabilities associated with cryptocurrency exchanges. Incorporating Crypto Assets into the securities law framework means that token issuers need to fulfill information disclosure obligations similar to those of an IPO, exchanges must meet security and compliance standards equivalent to those of a securities exchange, and investors can enjoy the same legal protections as stock investors.

This regulatory integration reflects global trends. The U.S. Securities and Exchange Commission (SEC) has long maintained that most crypto tokens are securities and should be regulated under securities laws. The European Union's Markets in Crypto-Assets Regulation (MiCA) has also established a comprehensive regulatory framework for crypto assets. Japan has chosen to include cryptocurrencies within its existing financial regulatory system rather than creating entirely new laws, and this pragmatic approach may allow for faster implementation of regulatory measures.

Takamizawa Sonomiya and the Future of Crypto in Japan

The changes at the political level have added new variables to Japan's crypto regulation. Sanna Takachi, who is likely to become Japan's next Prime Minister, is expected to bring new political momentum to risk assets, including crypto assets, while maintaining Japan's strict regulatory standards. Her leadership style will take a more open stance towards technological experimentation and indicates support for further development of digital infrastructure such as “technological sovereignty” and blockchain technology.

Kawasaki Saimi's economic policy proposals may also indirectly benefit the Crypto Assets industry. She supports lowering interest rates, tax cuts, and loose monetary policy, which could encourage more capital to flow into Japan's Crypto Assets industry. In her vision, Japan should not only be a user of Crypto Assets but should also become an innovator and standard-setter in blockchain technology. This combination strategy of “strict regulation + strong innovation” is similar to the approaches of crypto-friendly countries like Singapore and Switzerland, attempting to find a balance between protecting investors and promoting innovation.

If Takamori Saemae really becomes Prime Minister, the new regulations in Japan to combat Crypto Assets insider trading may become more detailed in execution. She might push for the establishment of specialized courts for Crypto Assets, train professional blockchain investigators, and even establish cross-border law enforcement collaboration mechanisms with international regulatory bodies. After all, the borderless nature of Crypto Assets means that the regulatory actions of a single country have limited effectiveness, and only international cooperation can truly curb cross-border insider trading.

Impact on 7.88 million users and the market

For Japan's 7.88 million Crypto Assets users, the implementation of the new regulations will have far-reaching effects. In the short term, strict regulations may reduce market speculation, and some traders who rely on information asymmetry for profits may exit the market. Exchanges will need to upgrade their monitoring systems and invest more in compliance costs, which may be partially passed on to users. Certain trading activities in gray areas will be subject to strict scrutiny, and market liquidity may fluctuate during the transition period.

However, in the long term, Japan's crackdown on insider trading in crypto assets will significantly enhance market fairness and transparency. When ordinary investors believe that market rules treat everyone equally and no longer worry about becoming targets of insiders, more funds will be willing to enter this market. Institutional investors, in particular, place great importance on a compliant environment, and clear regulations on insider trading may attract traditional institutions such as pension funds and insurance companies to allocate crypto assets. Japan is expected to become one of the most regulated and transparent crypto markets in Asia, which will solidify its important position in the global crypto ecosystem.