Japan to Double Leverage on Bitcoin and Cryptocurrency Trading

The Japanese Financial Services Agency (FSA) has tightened its policy on trading margin assets which can trade large amounts of money with a small amount of capital, up to twice the ratio over Bitcoin and other cryptocurrency transactions.

Until now, there were no clear rules set by the state. It aims to reduce the risk of loss due to excessive speculation and price volatility. Stipulated by Cabinet Office Ordinance of the Revised Financial Instruments and Exchange Law, which will come into effect in the spring of 2020, report reveals.

So far, the industry's voluntary rules set the leverage ratio for cryptocurrency margin trading at up to four times, but it has been reported that the FSA will tighten regulations within twice in the future. Twice does not make much sense as gearing.

Multiplier Effect

Cryptocurrencies including Bitcoin are volatile, and trading without leverage can be said to be high risk and high return. However, there is a transaction where margin is added to cryptocurrency and leverage is applied. This is similar to the margin and gearing system for FX and futures.

Nevertheless, if you trade with leverage in cryptocurrencies that are inherently volatile, you will have a very high risk and high return transaction. Therefore, if the cryptocurrency exchange offers unlimited gearing trading, there is a concern that investors who will go bankrupt due to reckless transactions will continue.

At the time of the cryptocurrency boom in late 2017, the system had not caught up yet, and there was no clear gearing limit or industry group that set the limit in the first place. However, in the spring of 2018, Japan's first cryptocurrency industry association, Japan Virtual Currency Exchange Association (JVCEA) was launched.

Orders from Above

JVCEA has examined and enacted rules for the blockchain and cryptocurrency industry, including a four-fold limit on leverage for cryptocurrency margin trading. A four-fold leverage cap was announced last spring, and it was decided that within a year it would encourage members of the association to comply.

These rules are voluntary rules of the industry determined by JVCEA and are not legally binding. However, over the weekend, the FSA moved to tighten leverage regulations and reported that it intends to double the gearing limit soon. The brushed up Financial Instruments and Exchange Law will come into force this spring, and will be included in the Cabinet Office Ordinance.

However, doubling the cap does not make much sense in leveraging. At present, the gearing upper limit is set to 25 times in the Japanese FX industry. The government considered that it was still a fairly high ratio, and two or three years ago it considered reducing the leverage cap to 10x. However, there is much opposition from the industry, and there is a history of giving up the reduction to 10 times.

Stocks vs Cryptocurrencies

Margin trading on stocks is about three times leveraged. Compared to these, it is much lower if the leverage limit of digital asset is doubled. Nevertheless, cryptocurrencies are inherently high-risk transactions and will probably be doubled to protect investors.

Then, what should you do if you want to trade with high gearing in digital asset, but after all, you will open an account with an overseas company and do business. Overseas cryptocurrency exchange Binance also offers cryptocurrency futures, and its leverage is quite high, around 100 times.

It is not wrong to strongly regulate the upper limit of gearing from the viewpoint of investor protection, but it is unlikely that this policy will stimulate the domestic cryptocurrency industry.