Japan, one of the world’s biggest cryptocurrency markets, is reportedly planning a massive clampdown on margin trading.
The controversial practice sees crypto users borrow money in order to perform trades on a larger scale. In some cases, platforms have enabled consumers to leverage as much as 25 times more than the money they have in their balance – turning their $100 into $2,500 of trading capital. Although this can help amplify profits when trades go well, it can also turn disastrous if risks don’t pay off, leaving borrowers on the hook to pay back the money they staked.
According to the Nikkei Asian Review, Tokyo is now planning to take action by capping the leverage that can be accessed for crypto margin trades at a maximum of four times a consumer’s initial deposit. In some circumstances, traders may only be able to leverage twice as much their own collateral.
The changes have been mooted for some time, and were initially proposed last summer. Japan’s Financial Services Agency has repeatedly stressed that it is not trying to frustrate the growth of the cryptocurrency industry nor shut it down, but wants it to develop responsibly under “appropriate regulation.”
Japan’s cabinet gave the green light to the proposed changes last Friday, and if approved, they would come into force in April 2020. In separate measures, crypto companies that offer margin trading would need to register within 18 months so they can be under the oversight of the FSA – and businesses in this industry would fall into different categories to help shield investors from risk and avoid high-risk strategies which could be compared to Ponzi schemes.
Crypto organizations in Japan have estimated that margin trading was worth an eye-watering $75.6bn in December 2018 alone – indicating that these assets are being depended on for speculative trading far more than everyday purchases. Indeed, research suggests that the total value of conversions between crypto and cash was 11 times less than the amount devoted to margin trading in the final month of last year.
The new rules surrounding crypto margin trading would largely be in line with the restrictions imposed on the forex markets.
Although some may regard this regulation as a sign that Japan is intent on making crypto unpalatable for investors, other analysts see the steps taken in recent days as a good thing. Not only could it trigger consistency if other governments and regulatory bodies around the world follow suit, but it may show that Tokyo is trying to hold crypto to the same standard as fiat. Depending on how you interpret the news, it could be seen as a big milestone in crypto’s journey to legal tender in the country of 126.8 million people.
Indeed, Canadian regulators have proposed banning crypto margin trading altogether with a view to “reducing the risks of potentially manipulative or deceptive activities in the marketplace.” This hardline approach may be in response to the QuadrigaCX scandal, which saw a Canadian exchange collapse after $140m in crypto went missing following the CEO’s death.