Japan Tightens Regulations for Cryptocurrency Margin Trading

Financial regulators in Japan have extended the cryptocurrency regulation to cover cryptocurrency margin trading according to a report by local news outlet Nikkei on March 18.

Per the report, new regulations that would limit the leverage in cryptocurrency margin trading at two to four times the initial deposit was approved by Japan’s executive cabinet on Friday, March 16. The approval was granted after some amendments were made to the original draft of the country’s financial instruments and payment services laws. The new limits are similar to standard limits adopted for foreign exchange trading.

In margin trading, the trader basically borrows money from the broker to trade in an asset, cryptocurrency in this case. Therefore following the new rules, all cryptocurrency exchanges in Japan are required to apply for new registrations with the Financial Service Agency (FSA). The new registration will be separate from the regular cryptocurrency exchange licenses already issued to 16 exchanges in the country. The exchanges are mandated to register within 18 months before the new rules take effect in April 2020.

Following the interest in cryptocurrencies globally, Japan decided to welcome and regulate the cryptocurrency industry thereby becoming the first country to have a definitive regulation for crypto exchanges. The decision encouraged the influx of crypto businesses in the country particularly after China shut its door to buzzing cryptocurrency activities.

Margin trading of cryptocurrency in the country has also risen dramatically. According to Japan’s cryptocurrency self-regulatory body Japan Virtual Currency Exchange Association (JVCEA), the total margin trading in Japan reached 8.42 trillion yen (approx. $75.6 billion) last December, making it 11 times the scale of normal cash transactions which was about 777.4 billion yen (approx. $7 billion).

The regulators have therefore swooped down on the trading platforms to prevent investors from having unnecessary losses on paper. It first seeks to separate exchanges that offer margin trading and those that issue Initial Coin Offering (ICO) tokens.

Those that offer margin trading, who will be subject to the new laws, will be closely monitored just like securities exchanges. The general crypto exchange regulation will continue to focus on preventing money laundering and terrorist financing. FSA hopes to prevent investors from Ponzi schemes while encouraging legitimate companies to conduct ICOs.

As Smartereum reported, the JVCEA which comprises all the registered crypto exchanges in the country recommended placing trading limits for a class of cryptocurrency traders to protect them from huge losses while trading. The body reportedly told its members to imposes a cap on trading volumes of customers who have small investments in digital assets noting that this will not only will the measure prevent heavy losses, but also address the problem of excessive basis daily expenses.

Early this year, Japan’s FSA indicated its plan to address a loophole in the existing cryptocurrency regulations by extending regulation to unregistered firms that solicit investments in cryptocurrencies.

While the new regulations may come out as strict, Japanese officials have assured that it does not intend to stifle innovation in the cryptocurrency sector. Last year a commissioner of the FSA communicates the agency’s desire for the industry to “grow under appropriate regulation.” “We have no intention to curb excessively,” he said at the time.

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