Japan is set to begin a review of the nation¡¯s cryptocurrency rules, opening up the possibility of lower taxes on digital assets and potentially paving the way for the roll out of domestic funds investing in tokens.

The Financial Services Agency in coming months will assess whether the current approach of regulating crypto under the payments law is adequate, an official at the agency said, asking not be identified in line with the institution¡¯s rules.

The FSA will examine whether the law offers adequate investor protection, since tokens are used mostly for investing rather than payments, the official said. That may lead to changes to the law, or the reclassification of crypto as financial instruments that fall under the investment law, the official said.

Reclassifying digital assets via the Financial Instruments and Exchange Act would strengthen investor safeguards and usher in other ¡°dramatic changes,¡± said Yuya Hasegawa, a market analyst at crypto exchange Bitbank.

The shift would boost the sector¡¯s effort to persuade officials to lower the levy on crypto gains from as much as 55% presently to 20%, in line with other assets such as stocks, Hasegawa said. Scrapping a ban on the launch of exchange-traded funds containing tokens would also become a ¡°natural¡± step, he added.

The FSA official declined to comment on what might happen should the reclassification occur, saying there are no foregone conclusions and that the upcoming review may last through the winter.

Japan¡¯s crypto executives have long called for less onerous regulations to curb costs and spur growth. Current rules are viewed as tight, reflecting lessons learned from past scandals. One of the most notorious was the 2014 hack and subsequent bankruptcy of Tokyo-based Mt. Gox, then the biggest bitcoin trading venue. DMM Bitcoin suffered a $320 million breach this year and has to deliver a business improvement plan to the FSA by Oct. 28.

At the same time, Japanese businesses such as Sony Group are seeking to tap blockchain technology. The country¡¯s biggest bank, Mitsubishi UFJ Financial Group, is looking into issuing stablecoins ¡ª a type of digital token meant to hold a constant value ¡ª under laws implemented in 2023.

Regulators took steps toward easing listing requirements for digital tokens on crypto exchanges during the prime ministership of Fumio Kishida, who prioritized web3 ¡ª a term that refers to a vision of the internet built around blockchains. But it is unclear if his successor Shigeru Ishiba will also champion web3.

Trading activity at Japanese digital-asset exchanges has begun to recover this year, helped by a rally in bitcoin and other tokens. Average monthly volumes are nearing $10 billion at centralized Japanese exchanges, up from $6.2 billion in 2023, according to figures from CCData through August this year.