Japan Announces Tighter Regulation on Cryptocurrency Margin Trading

Japan cryptocurrency regulations margin trading

Authorities in Japan have stepped up their efforts to regulate the cryptocurrency sector with new measures designed to introduce a limit on margin trading.

In the latest example of crypto-specific regulation to come from lawmakers in Japan, the proposals will cap the maximum leverage to two to four times the margin on deposit, in a move prompted by concerns over the high levels of leveraged transactions within Japanese crypto markets.

Margin trading allows investors to take larger positions for a percentage of the total transaction cost, increasing volatility and thereby the potential for more significant returns.

However, greater degrees of leverage also introduce more risk, and regulators are keen to avoid damaging trust in the emerging sector by allowing investors to take ever riskier positions in crypto markets.

The new rules bring crypto trading in line with forex trading, which is already subject to a similar cap.

The draft amendment, which has received the backing of lawmakers, goes on to set out a new structure for regulating crypto exchanges that offer leverage.

This is a separate licensing structure from that recently brought in to regulate crypto exchanges, and will require a separate registration process for exchanges that wish to continue to offer margin trading facilities.

The new laws are expected to come into force in April 2020, with exchanges allotted a period of a further 18 months to come into compliance with the new registration requirements.

According to the Financial Services Agency, which is responsible for enforcing the new measures, the scheme will also enable greater distinctions between margin trading exchanges and those involved in promoting initial coin offerings, which are considered to pose a greater risk to uninformed investors.

Representatives from the regulator have said the proposals should also help encourage legitimate firms to use ICOs to raise capital, while deterring those that attempt to use the funding model for fraudulent purposes.

While Japan has gone further than many jurisdictions in regulating cryptocurrencies to date, these moves have been largely welcomed by operators and investors alike, introducing essential legal certainty into the crypto ecosystem.

With the latest proposals set to introduce even more stringent checks, it remains to be seen whether this move will inspire other governments and regulators worldwide to streamline their own approach to crypto regulation.