Japan Crypto Regulation: FSA and SSEC Plan to Ban Insider Trading

The Japanese government is set to tighten its grip on the cryptocurrency market with new rules aimed at banning insider trading. This new Japan crypto regulation intends to criminalize unfair trading practices and grant authorities the power to investigate and penalize offenders. It would allow for fines tied to illicit gains and enable the referral of serious cases for criminal prosecution.

Notably, the Financial Services Agency (FSA) and Securities and Exchange Surveillance Commission (SESC) have joined hands to establish a framework that classifies digital assets as traditional securities. This would bring these assets under the same regulatory umbrella, thereby subjecting them to stricter regulations and oversight.

New Japan Crypto Regulation: What You Need to Know

According to a Nikkei report on Wednesday, the Japanese regulators are planning to ban insider trading in cryptocurrencies, marking a significant shift in the country's approach to digital asset regulation. The SESC will be authorized to investigate suspected violations and issue penalties for trades based on undisclosed information.

The plan would also empower the watchdog to recommend surcharges and refer severe cases for criminal prosecution. The FSA will consider the details of the forthcoming Japan crypto regulation intended for implementation in 2026. This is meant to create greater awareness of regulation and represents a marked change from the country’s previous position, as, under the Financial Instruments and Exchange Act, cryptocurrencies were exempt from confidential trading rules.

What is Insider Trading?

For context, insider trading refers to the act of purchasing or selling securities, including cryptocurrencies, based on material non-public or confidential information that has not been made known to the investing public. Examples of material inside information can include confidential information related to the performance of a company, a merger, and/or any other material transaction that could affect the value of a security or cryptocurrency.

For instance, in the United States in 2022, there was a case involving a Coinbase product manager named Ishan Wahi. Wahi knowingly conveyed undisclosed information he obtained regarding forthcoming token listings on Coinbase to his brother Nikhil Wahi and to a friend, Sameer Ramani. Both Nikhil Wahi and Ramani purchased the tokens before the listings were publicized and made a profit on the trades.

The United States government identified and analyzed the so-called "Coinbase effect,” which refers to the price surge that the cryptocurrency experienced after being listed on the exchange. The Wahi brothers engaged in conduct that utilized their position of knowledge of tokens coming to market for the purposes of profiting from the anticipated price increase.

However, there are difficulties for the Japanese authorities to address the issue of crypto insider trading, especially considering the fact that many tokens on the market are decentralized and do not have a clear issuer. This ambiguity makes it hard to define who constitutes an insider, limiting their experience in handling such cases.