Japan’s financial regulator, the Financial Services Agency(FSA), has laid down plans to introduce a rule limiting the leverage in cryptocurrency margin trading to twice the deposits of traders.

The new regulations are meant to reduce the risks of inflating risks as a result of volatile price fluctuations. While quite controversial, marginal trading is a vital trading tool and can involve both substantial profits and losses, especially when large numbers of investors. These regulations are expected to be added to a Cabinet Office order linked to the revised Financial Instrument and Exchange Act that will be implemented in Spring, 2020.

Prior to arriving at the new rule, the FSA is reported to have consulted the Japan Virtual Currency Exchange Association regarding the limitations after the Diet passed the revised law in May 2019.

FSA New Rule to Combat Crypto Volatility

The new rules, therefore, mean that crypto exchanges in Japan will face much stricter restrictions regarding margin trading starting from Spring. The move by the FSA to limit marginal trading comes at the backdrop of the finance regulator imposing a limit of four times traders’ deposits last year.

According to FSA, the new regulations will go a long way in combating crypto volatility in cryptocurrency markets, which usually amount to significant financial losses. According to the source, the FSA’s decision to impose a leverage cap of two times was influenced by past price fluctuations and cryptocurrency regulations in Europe and the United States.

While the new rule is expected to be enforced in Spring, according to the Japan Times, it remains unclear whether the margin trading limitations will take effect immediately following the introduction of the Act.

Nonetheless, when the new rule takes effect, cryptocurrency exchange operators are expected to be pressured to change their business models as per the new regulations. This may lead to speculative traders to lose interest in cryptocurrency margin trading, probably due to reduced profit margins. With the limitation in marginal trading expected to take effect in Spring, some crypto exchanges notably Coincheck has resorted to halting marginal trading starting March.

Japan’s Crypto Watch

In recent times, Japan seemed to have changed its stance on cryptocurrency. The country has since implemented permissive regulations to foster crypto growth and, at the same time, closely monitored crypto exchanges. Whether the new regulations regarding marginal trading will counter crypto volatility, time will tell.

