Japan’s Financial Regulator Eyes Strict Limits on Crypto Margin Leverage

Japan with cryptocurrencies

Japan’s Financial Services Agency is planning to impose strict restrictions on permitted leverage for margin trading in cryptocurrency exchanges. The planned changes were reported by the Japanese news outlet Japan Times which references sources at the agency.

The financial regulator is pushing for these restrictions in order to reduce the risk for margin traders on cryptocurrency trading platforms. According to the report, only twice as much as the deposited amount will be allowed as leverage. The volatility of the cryptocurrency markets is a major factor in cutting down the permitted leverage to half of what it was before. Previously, the exchange industry had set a limit on leverage of 4x the deposited amount, imposed by a self-regulatory body.

The sources at the FSA also revealed that the decision to reduce the permitted leverage is based on the regulations applied in the US and European cryptocurrency industries. Furthermore, historical prices and market shifts have also been taken under consideration.

Margin trading inherently involves high-risk/high-reward trades. Cryptocurrency exchanges have received criticism in recent times for offering as much as 100x leverage on some crypto products. The extremely high leverages have also been attributed to cryptocurrency price manipulation in the past. According to the Japan Times report, the new rule will be included in the Cabinet Office order to the revised Financial Instruments and Exchange Act. The act will become part of the law in spring this year.

The Digital Currency Industry in Japan

In December, Bank of Japan’s (BOJ) Governor Haruhiko Kuroda said that there is no interest among consumers for a central bank digital currency. He stated:

“In Japan, the amount of cash outstanding is still increasing, and it does not seem that there is a demand for CBDC from the public at present. Nevertheless, the Bank of Japan has been conducting technical and legal research on this matter in order to stand ready when the need for CBDC 13 may arise in the future. The Bank also needs to study the impact of CBDCs on financial intermediation.”

Japan has been known to introduce progressive regulation in order to nurture its cryptocurrency markets. Its financial regulators and institutions have been working with and monitoring local cryptocurrency exchanges closely. However, a cyber-attack on the Japanese crypto exchange CoinCheck back in 2018, which resulted in $500 million stolen has put the nation’s regulators on edge.

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