Japan’s financial watchdog limits leverage on crypto derivatives

Japan’s Financial Services Agency will limit leverage on crypto derivatives platforms in the country to just twice the deposits made.

According to the Japan Times, the country’s financial watchdog will no longer permit high leverage on crypto derivatives platforms. Leverage on cryptocurrency platforms will be limited to twice the amount the trader puts down.

Japan clamps down on leverage

This new regulation of 2x leverage is stricter than the industry standard cap in Japan of 4x. It will be established in order to protect retail traders and reduce their risk of suffering epic losses at the hands of volatile and unexpected price fluctuations.

The new rule will go into force this spring and be included in a Cabinet Office order linked to the revised Financial Instruments and Exchange Act.

Cryptocurrencies have generally been well received in Japan. Their ability to offer low remittance fees and faster payments is particularly appealing.

Last December, researchers from the central bank of Japan began exploring the possibility of a digital yen. However, authorities later announced that at the current time, there was no demand for it.

In fact, according to the report by the Japan Times, enthusiasm for cryptocurrencies is waning. Rather than using them for their positive qualities, some 80-90% of cryptocurrency transactions in Japan are “speculative margin trading”.

This has led Japan’s Financial Services Authority to issue the new regulation after discussions with the Japan Virtual Currency Exchange Association – an industry body.

Based on historical price fluctuations, Japan decided to set the cap at 2x. The country is also taking queues from the US, EU, and the UK, all of which are stepping up measures to protect retail traders from accumulating huge losses on crypto derivatives exchanges.

In the US, retail traders are banned from using crypto derivatives sites. In the UK, the FCA has proposed a ban on crypto derivatives. However, action has yet to be taken.

Two times leverage a tiny amount compared to existing offers

Two times leverage is a minuscule amount compared to the current leverage levels offered by popular derivatives platforms such as BitMEX and OKEx, which offer leverage of up to 100 times.

It means that cryptocurrency exchanges offering margin trading in Japan will have to adjust their business models to comply. There is also the threat of a loss of customers whose interest in trading is reduced by the low amount of leverage.

The new regulation comes at an increasingly difficult time for cryptocurrency exchanges. As the AMLD5 regulations came into effect last Friday, exchanges are already scrambling to adjust their KYC policies to achieve compliance.

In fact, crypto derivatives exchange Deribit last week announced that it would be relocating to Panama in order to avoid the European crackdown.

One more slingshot at the retail crypto derivatives market from Japan’s Financial Services Authority may not bode well for the future of this industry.