Japan has reclassified cryptocurrencies as financial instruments, a structural change that establishes a legal framework for separate taxation of crypto assets and a foundation for future crypto exchange-traded funds (ETFs).

The legislation, approved by parliament on Wednesday, amends the Financial Instruments and Exchange Act and the Payment Services Act (PSA). The revision shifts the classification of cryptocurrencies from a framework primarily for payment tools to one that treats them as investments alongside other financial instruments. The new rules are expected to take effect in 2027.

The new framework also removes a key legal obstacle for future spot Bitcoin exchange-traded funds (ETFs), although lawmakers have not yet approved any specific ETF products. Officials from Japan's Financial Services Agency stated that the country will now consider establishing a regulatory framework for cryptocurrency ETFs.

The legislation increases the maximum prison sentence for unregistered cryptocurrency operators from three years to ten years, and raises the maximum fine from 3 million yen (approximately $18,500) to 10 million yen. The bill also introduces stricter insider trading rules and expands disclosure requirements for cryptocurrency issuers and exchanges.

Lawmakers also approved a framework to reduce the current cryptocurrency tax burden from up to 55% to 20%, although the lower rate is not expected to take effect until 2028.

The tax reduction proposal was introduced late last year with support from the government and the ruling coalition. The new structure allocates the 20% tax between central and regional authorities at rates of 15% and 5%, respectively.

The cryptocurrency rules will require crypto issuers to provide regular disclosures, while exchanges will face stricter investor protection and reporting requirements.