Japan’s Financial Regulator Discussing Caps on Crypto Margin Trading

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Japan’s Financial Services Agency (FSA) is planning to put a cap on the leverage available for crypto margin trading to curb speculation and risk, Nikkei Asian Review reported on October 25, 2018.

Caps on Cryptocurrency Margin Trades Weighed in Japan

Japan’s financial watchdog is reportedly planning to put a cap on the leverage available for crypto margin trading. According to sources, the decision comes as the country is looking to curb speculative trading and limit user exposure to volatility risks.

The report stated that cryptocurrency marketplace operators must register with the FSA, but that there are still no clear regulations that would govern the transactions themselves. Due to that, some exchanges are offering as much as 25 times leverage.

That means traders can effectively borrow cryptocurrencies worth up to 25 times the deposit with an exchange. This is troubling since a 4 percent drop in bought crypto assets might completely wipe out the deposits. The caps are also a sharp contrast to recommendations given both by experts in the field and the government, as many experts are proposing caps between two and four times.

The news follows previous statistics released by the FSA, which indicated cryptocurrency margin trading has seen rapid growth in Japan. However, despite the fact that 80 percent of total crypto trading for 2017 was conducted through margin trading, Japan still doesn’t have regulations in place that would focus on this part of the trading industry.

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As of October 2018, Japan has 16 officially registered exchanges, with only seven of them offering margin trading services. An FSA panel including experts will discuss new rules for possible legal changes, the Asian Review reported.

JVCEA Proposes a Leverage Cap

Formed in the aftermath of the infamous Coincheck hack that resulted in a theft of $500 million in crypto, Japan’s Virtual Currency Exchange Association (JVCEA) is a product of FSA’s fight to bring proper changes to the growing crypto market.

JVCEA, founded in April 2018, is a self-regulatory body formed by the 16 licensed trading platforms in Japan. The FSA officially approved the JVCEA as a “certified fund settlement business association” on October 24, meaning it now has legal status to police domestic cryptocurrency exchanges.

According to JVCEA, the borrowing power should only be four times larger than deposits, in every exchange. The Association’s head, Taizen Okuyama, who is also Money Partners Group’s president, declared that this is a provisional measure. According to him, a ratio of 4 is not adequate.

Margin trading is a popular way to trade cryptos in Japan, and any decisions to change it will affect numerous traders and platforms alike. However, the overwhelming sentiment towards introducing the cap has been positive, as many believe it it will reduce risks and improve user protection.