Japan’s two most powerful financial watchdogs are done asking nicely. The Financial Services Agency and the National Police Agency issued a joint directive to the country’s licensed crypto exchanges, demanding tighter withdrawal restrictions and more robust monitoring of suspicious fund flows.

The numbers that prompted the crackdown

In 2023, Japan recorded 19,038 fraud cases with total damages reaching ¥45.26 billion. Suspicious transaction reports tied to crypto assets climbed to 19,344 cases in the same period, a sharp increase from prior years.

Nearly half of all proceeds stolen through online bank fraud, approximately ¥8.73 billion in a single reported period, were ultimately routed into crypto exchange accounts. Scammers steal from bank accounts, then funnel the money through crypto to obscure the trail.

What the FSA and NPA are actually asking for

The joint directive focuses on two main areas: withdrawal restrictions and illicit fund monitoring. Exchanges are being told to tighten the conditions under which users can withdraw funds, particularly for accounts that show behavioral patterns consistent with receiving stolen money.

The FSA had already flagged this issue in February 2024, issuing guidance specifically about unlawful transfers into crypto exchange accounts. The latest joint directive with the NPA signals an escalation.

Japan currently has between 27 and 30 Crypto-Asset Exchange Service Providers, or CAESPs, registered with the FSA. These entities already operate under strict rules covering asset segregation, cybersecurity standards, and anti-money laundering compliance. The new directive layers additional fraud prevention expectations on top of an already demanding regulatory framework.

Japan introduced a licensing system for exchanges years before most Western jurisdictions, partly in response to the 2014 Mt. Gox collapse and the 2018 Coincheck hack.

What this means for exchanges and investors

Japan is reportedly planning to subject crypto exchanges to standards closer to those governing securities firms, with major changes expected between 2025 and 2026. The current directive fits neatly into that longer arc.

For investors trading on Japanese platforms, the short-term effect could include more friction at the withdrawal stage. Additional verification steps, cooling-off periods on withdrawals, or enhanced monitoring flags for unusual activity are all tools exchanges might deploy to satisfy regulators.