While Japan may be one of the most progressive cryptocurrency countries in the world, recognising digital currencies as official method of payment, the Japanese Financial Services Agency (FSA) is now taking steps to put imminent trading limits on cryptocurrency exchanges in the country. The leverage is to be maxed at twice the deposits of traders.
The major reason behind the decision, as reported by The Japan Times last week, is that the FSA is looking to limit the ever-increasing losses suffered by traders – all due to the volatile crypto prices in recent times.
Up until now, the maximum leverage was capped at 4x and the FSA did not impose any specific trading restrictions on crypto assets.
The new regulation will come into effect in the spring of 2020, as the FSA intends to include it in the Cabinet Office order that is related to the revised FIEA (Financial Instruments and Exchange Act).
Japan is following in the footsteps of other large crypto players, such as the US and Europe. The difference, however, was that the latter have already taken serious steps in regulating the crypto industry owing to the fluctuating prices of the digital coins. Japan’s FSA is just starting out in the “regulatory game”. The watchdog has realised that the 4x leverage magnifies the losses experienced by traders, hence the reduction to 2x.
The problem with margin trading is that not only does leverage count, but also the number of investors/traders that engage in this type of trading at once. The larger the number of traders, the larger the losses/win effects.
According to Cointelegraph, open interest in margin trading was at an all-time high in the country in October, 2019.
One of the crypto “mishaps” for Japan was when Coincheck suffered a cyber attack that cost investors around $0.5 billion. This event forced the FSA to tighten the regulation on cryptocurrency exchanges, requiring the licensing of each one. Coincheck announced that it would terminate the leveraged trading altogether.