The FSA issued a warning to a Hong-Kong based cryptocurrency exchange. The FSA said in a statement that Binance, one of the world's largest cryptocurrency exchanges, had been operating in the country without registration.
The FSA alleges that the platform was engaging in business with Japanese residents via the internet even though it lacks permission to do so.
The regulator said Binance allowed Japanese residents to open accounts without confirming their identities, adding that the exchange would face criminal charges if it continued to do business without a license.
An FSA official told Reuters it had not given the exchange any particular deadline to cease its operations.
Binance Chief Executive Changpeng Zhao said on Twitter the exchange was told of the warning on Friday morning, and was engaging with the watchdog.
Last year, Japan became the first country to regulate the cryptocurrency industry, requiring all exchanges to register with the authorities in an effort to bolster consumer protection and clamp down on illegal uses of digital money.
The warning against Binance is the latest move by the FSA to tighten consumer protection in the wake of the $530 million theft of digital money from Tokyo-based Coincheck Inc in January.
In February, it warned Macau-based Blockchain Laboratory that provided bitcoin purchases and initial coin offering services to Japanese investors without registration.
Blockchain Laboratory pulled out of the country after the warnings.
The regulator also recently punished seven cryptocurrency exchanges already registered or awaiting registration over issues ranging from lax security to poor controls on money laundering.