Margin trading is a controversial topic in the cryptocurrency community, to say the least. Some think that using leverage in cryptocurrency trades is a valid trading vehicle, while others see it as speculative nonsense and an unwarranted method of trading that is risky for common consumers.
For the uninitiated, margin trading allows you to borrow boat-loads of money from an exchange or platform to utilize in trades. While this may sound a great investment opportunity to some, margin trading can rapidly magnify a user’s gains or losses, with some unfortunate traders losing their life savings on high margin trades.
As per a report from the Nikkei Asian Review, a leading English news outlet on Asian business-related news, Japan’s leading cryptocurrency self-regulatory body is moving to limit margin trading in the country.
The so-called “Japan Virtual Currency Exchange Association” (JVCEA) recently proposed a ruleset which would see a 4-to-1 leverage cap placed on margin-supported exchanges, which means that investors would only be able to borrow up to four times the value of their deposited funds.
In their present condition, exchanges can permit up to 25x leverage for traders, which is Japan’s current limit for this form of trading. As the local news source points out, a 4% drop in a 25x leverage trade would decimate a trader’s entire deposit, reducing the funds he or she had to zero.
For naive traders looking to turn a quick profit, the 25x leverage option is usually the place to go. However, for a wide majority of this variant of traders, this level of leverage is often too much for these individuals to handle.
However, it was noted that the self-regulatory board may allow specific exchanges to surpass the 4-to-1 limit if certain expectations and conditions are met. One of these conditions will be the implementation of an automatic stop-loss system, which would limit the magnitudes of risk a user could take.
If these rules are agreed on, the JVCEA will be set to implement the aforementioned rules over the upcoming year, giving exchanges an ample amount of time to adjust to this drastic change.
Crypto Regulation In Japan Remains A Hot Topic
Cryptocurrency-related regulation became the talk of the town in Japan following the devasting hack of the Coincheck exchange. As was reported by Ethereum World News, CoinCheck, one of the foremost Japanese exchanges, was victim to a ~$550 million hot-wallet hack in January.
Despite the exchange eventually reimbursing customers affected by the cyber attack, Japanese regulators felt it necessary to tackle the issue head-on. In the months following the CoinCheck debacle, the Japanese Financial Services Agency (FSA) began to propose and impose a vast array of rules that limited how exchanges could operate.
Some notable rules imposed on exchanges include the ban on the trading of privacy-centric cryptocurrencies, mandatory KYC/AML practices, cold storage requirements, and increased monitoring for cases of money laundering and terrorist financing.
It is likely that the FSA’s hard-lined approach to regulating cryptocurrencies will only continue moving into the future, as Japan continues to be a crypto capital of the world.