Japan’s financial watchdog, the Financial Services Agency (FSA), is reportedly considering capping cryptocurrency margin trading leverage options in an attempt to curb speculative trading and limit risk exposure.
According to Nikkei, cryptocurrency exchanges in Japan currently need to register with the FSA to operate, but there are no regulations regarding the transactions within their platforms. Some exchanges cap margin leverage options to 25 times the deposit, mirroring the rules for foreign exchanges.
For cryptocurrencies, Nikkei adds, experts suggest a cap between 2 and 4 times. Its report notes that 80% of Japan’s $613 billion transacted on cryptocurrency exchanges in 2017 were conducted through margin trading. Seven out of the 16 exchanges registered with the financial regulator in the country offer margin trading options.
A lower cap is being proposed for cryptocurrencies as experts claim their volatility can mean additional risk for investors. A leverage of 25 times can lead to an account’s liquidation if the price of a cryptoasset drops as little as 4% a not-so-uncommon fluctuation in crypto markets.
The amount of margin deposit granted or collected is calculated by applying a rate determined by the price disparity to the execution amount (JPY).— bitFlyer（ビットフライヤー） (@bitFlyer) December 28, 2017
An FSA panel is now set to discuss new rules on legal changes that would cap margin trading. The regulator’s move is reportedly being made as a response to user concerns that started arising after Coincheck was hacked for over $500 million earlier this year.
Per Nikkei, the FSA has been receiving inquiries regarding concerns with crypto exchanges. The number of inquiries reportedly “more than quintupled” to 68. These address problems that could involve, for example, system outages. These are critical in margin trading, as small price changes can lead to severe gains or losses.
Japan’s Virtual Currency Exchange Association (JVCEA), a self-regulatory body created after the Coincheck security incident, set margin trading limits to 4-to-1 back. At the time Taizen Okuyama, the Monetary Partners Group president heading the JVCEA, stated:
This is just a provisional measure – I don’t think a ratio of 4 is adequate.
The JVCEA, as CryptoGlobe covered, recently became a self-regulatory body authorized by the FSA. This, as the regulator recognized the organization’s effectiveness in overseeing the industry. It now has the authority to establish standard operating procedures for local cryptocurrency exchanges, and the authority to take action in rule violation cases.
Recently, cryptocurrency exchange Binance detailed it donated over $500,000 in bitcoin and Ethereum’s ether to help Japan’s natural disaster victims.