TLDRJapan’s FSA plans to register crypto custody and trading service providers before exchange partnerships.Japan crypto exchanges follow strict rules, but third-party custody providers currently face no oversight.DMM Bitcoin’s $312M hack in 2024 triggered scrutiny of outsourced trading and custody systems.New rule changes may amend Japan’s Financial Instruments and Exchange Act by the 2026 Diet session.FSA also supports JPYC stablecoin launch and a pilot with Japan’s three major banking institutions.Japan’s Financial Services Agency (FSA) is working on a plan to tighten rules around digital asset custody. A proposed system would require service providers that manage crypto custody or trading operations to register with financial authorities before partnering with exchanges.Regulatory Focus Shifts to Third-Party Crypto Service ProvidersCurrently, exchanges operating in Japan must meet strict guidelines for safeguarding user assets, including cold wallet storage. However, similar requirements have not been extended to external firms that handle custody or trading systems on behalf of these exchanges.The FSA is reviewing a framework that would close this regulatory gap. Under the potential rule, only registered custodians would be permitted to offer systems to crypto exchanges. This would prevent platforms from outsourcing critical services to unregistered firms.Security Concerns Spark Action from Financial AuthoritiesThe regulatory push follows a major security breach at DMM Bitcoin in 2024. In that incident, hackers stole approximately 48.2 billion yen ($312 million) in bitcoin. Investigators traced the breach to Tokyo-based software provider Ginco, which had been contracted to manage DMM’s trading infrastructure.This event exposed vulnerabilities tied to outsourced trading systems, prompting the FSA to review oversight of third-party service providers. According to meeting discussions, most members of the Financial System Council supported stronger registration and monitoring measures for these firms.New Rules May Be Added to Existing Exchange ActThe agency is expected to compile a formal report on the proposal, which it plans to submit during the 2026 ordinary Diet session. The rule change would be an amendment to the Financial Instruments and Exchange Act, which already governs crypto exchanges and securities.In addition to custodial reforms, the FSA continues its work on advancing stablecoin frameworks. Last month, JPYC became Japan’s first yen-pegged stablecoin approved by regulators. The agency has also backed a stablecoin pilot with Mizuho Bank, MUFG, and SMBC. The pilot aims to test broader use of stablecoins in domestic financial systems, with support from key banking institutions.The post Japan Considers Mandating Crypto Custody Providers to Register with Authorities appeared first on Blockonomi.