Lawmakers said digital assets have outgrown their initial role as payment tools and now require a regulatory approach suited to investment products.

Japan has officially reclassified cryptocurrencies as financial instruments, marking a major policy shift that establishes a legal foundation for separate taxation and opens the door to future crypto exchange-traded funds (ETFs).

Passed by Parliament on Wednesday, the legislation updates the Financial Instruments and Exchange Act as well as the Payment Services Act (PSA). It moves crypto away from a payment-centric classification and instead recognizes it as an investment asset alongside traditional financial products. The new framework is expected to take effect in 2027.

The changes also remove a key legal barrier to launching spot bitcoin ETFs, although no such products have been approved yet. Officials from the Financial Services Agency indicated that Japan will now consider building a regulatory structure for crypto ETFs.

The law significantly increases penalties for unregistered crypto operators, raising the maximum prison term from three years to 10 years and boosting fines from 3 million yen ($18,500) to 10 million yen. It also introduces stricter insider trading rules and broadens disclosure requirements for crypto issuers and exchanges.

Lawmakers also approved a plan to reduce the current crypto tax rate—from as high as 55% down to 20%—though the lower rate is not expected to be implemented until 2028.

The tax reform proposal, introduced late last year with backing from the government and ruling coalition, divides the 20% tax between national and regional authorities, allocating 15% to the central government and 5% to local governments.

Under the new rules, crypto issuers will be required to provide ongoing disclosures, while exchanges will face tighter investor protection standards and more stringent reporting obligations.