Japan reclassified cryptocurrencies as financial instruments, a structural shift that establishes the legal framework for separate taxation of crypto assets and 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). It shifts crypto from a framework in which it was primarily treated as a payment tool to one that treats it as an investment alongside other financial instruments. The new rules are expected to take effect in 2027.

The new framework also removes a key legal hurdle for future spot bitcoin exchange-traded funds (ETFs), although lawmakers did not approve any ETF products. Financial Services Agency…