By Takahiko Wada and Hideyuki Sano

TOKYO (Reuters) - Japan's Financial Services Agency said on Friday it has approved 11 companies as operators of cryptocurrency exchanges, in a move that sets the country apart from its neighbors which are tightening their grip on virtual money.

The Japanese government recognized bitcoin as legal tender in April and required cryptocurrency exchange operators to register with it.

The move was aimed at avoiding a repeat of the failure in 2014 of Tokyo-based Mt Gox, the world's largest bitcoin exchange at the time.

The financial watchdog has laid out various requirements, such as building a strong computer system, segregation of customer accounts and checking the identity of customers, a key issue given concerns cryptocurrency could be used for money-laundering.

Trading in bitcoin and other cryptocurrencies among Japanese investors has gained momentum this year, helped by the legal recognition as well as spectacular surges in the price of bitcoin and ethereum.

Industry officials say Japan is now one of the world's biggest bitcoin trading hubs as China -- by far the largest user of bitcoins until early this year -- clamps down on cryptocurrencies.

With the new regulation, Tokyo aims to balance the need to protect investors with the need to support fintech innovations, FSA officials said.

Officials this month said they have no plan to ban initial coin offerings (ICOs), although there have been few launches of token-based digital currencies in Japan to date.

Tokyo's stance is in contrast with those of other regulators in Asia.

Beijing this month ordered some bitcoin exchanges to shut. [L8N1M72UR]

And earlier on Friday, South Korea's financial regulator said it will ban raising money through all forms of virtual currencies.

The FSA is still reviewing registration applications from 17 other exchange operators.

On the other hand, 12 firms that had been in the business before the new regulation decided to close down, the FSA said.

(Reporting by Takahiko Wada and Hideyuki Sano, writing by Hideyuki Sano; Editing by Sam Holmes and Kim Coghill)