Why Japan’s cryptocurrency regulation is becoming stricter

Japan made cryptocurrencies legal property under the Payment Services Act in April 2017. The country has the world’s largest market for Bitcoin and, as of December 2017, all gains on cryptocurrencies are classed as ‘miscellaneous income’.

The country has been firm with cryptocurrency regulations, making Japan’s exchanges similarly progressive. After a series of high-profile attacks, including the famous Coincheck heist of $530 million in digital assets, crypto regulations became of national concern for Japan.

As a result of this, Japan’s Financial Services Agency (FSA) stepped up its regulations on all crypto trading and exchanges. Now, all cryptocurrency exchanges in the country have to registered with the FSA in order to operate. This process can take up to six months to complete and requires stricter laws around both anti-money laundering (AML) and cybersecurity.

Clamping down on margin trading

Margin trading is the term used to describe the use of borrowed funds that are often obtained from a broker or exchange to trade a financial asset. Margin trading is notably different from spot trading because it involves borrowing money from an exchange with an attached fee.

Borrowing money is known as ‘leveraging’. For example, BitMEX offers several amounts of leverage from 1x up to 100x. Using 100x leverage would mean you are trading with 100 times more than the money you have initially put into an asset.

Recently, Japan announced it is putting stricter rules for crypto regulation in place starting from next year. Japanese financial authorities are set to expand the current rules for cryptocurrency trading in order to bring a brighter future to the world’s biggest virtual currency marketplaces.

The new amendments state two things. The first is that all Japanese cryptocurrency exchanges that handle margin trading will have to obtain new government registration. They will have to register with the government within a time period of 18 months from the date that the regulations are implemented. All companies that do not comply with these new rules will be shut down immediately.

The second amendment is that there will be a cap on margin trading in line with forex trading at two-to-four times the initial deposit. Currently, the cap on margin trading is at 25 times the initial deposit.

What do these stricter regulations mean?

These new rules are being implemented to allow Japan to closely monitor exchanges in an effort to protect consumers. All exchanges that offer margin trading and those that issue tokens through ICOs will be separated and regulated in a different way. The hope is that this categorisation will allow the FSA to clamp down on all the scam investment opportunities whilst not hurting the legitimate crypto market.

The amendments approved by the cabinet will also protect investors against money launderers. Another reason for the new laws is so Japan can attempt to bring the already closely regulated market more in line with modern and conventional financial market regulations.

Japan is known for being a cryptocurrency haven, and the market in Japan has been growing for some time now thanks to the country’s progressive stance on digital currencies. In 2018, the FSA approved the Japan Virtual Currency Exchange Association to be a self regulatory body. With this authority, the group was allowed to create guidelines for implementing industry-wide security standards.