Japan's cabinet has approved a bill that would reclassify cryptocurrencies as financial products under the Financial Instruments and Exchange Act, marking a step closer toward tighter oversight of the crypto industry.

Nikkei reported that the government approved the law amendments at a cabinet meeting on Friday. If passed during the current Diet session, the legislation is expected to take effect as early as fiscal 2027.

The bill would mark the first time crypto assets are regulated as financial products under Japan’s securities law, while prohibiting insider trading and transactions based on non-public information. Crypto issuers are also required to disclose relevant information annually, according to the report.

Currently, the Financial Services Agency (FSA), the country's top financial watchdog, primarily regulates crypto under the Payment Services Act, viewing it as a means of payment. The shift signals a move toward broader oversight of crypto-related businesses.

The new legislation also seeks to strengthen penalties. For unregistered operators, the maximum prison sentence would be raised from three years to 10 years, and the maximum fine would increase from 3 million yen ($18,830) to 10 million yen ($62,770).

Japan has been exploring ways to advance its crypto regulation while maintaining innovation. In January, the FSA was reportedly planning to include crypto in the list of base assets for exchange-traded funds, paving the way for potential approval as early as 2028.

Meanwhile, Japanese authorities are seeking to cut the tax rate on crypto income from a maximum of 55% to 20%, matching that of stock investments.