Japanese financial regulators have officially proposed cutting the leverage cap for cryptocurrency margin trading.
The Japanese Financial Services Agency (FSA) — the country’s financial regulator — proposed lowering the leverage rate limit of cryptocurrency margin trading from 4x to 2x.
The FSA announced the proposed measure on Jan. 14 in a cabinet office ordinance — an official order that is issued along with a new law.
If enacted, the proposal would be a first for the Japanese government in regulating the rate of crypto margin trading. According to Nikkei, there were previously no rules set by the state.
The FSA reportedly plans to put the order into practice in April when a revised version of the Financial Instruments and Exchange Act enters into effect. The FSA is accepting public comments regarding the ordinance until Feb. 13.
Margin trading allows traders to use borrowed funds in order to increase their potential profits, but it is also a high-risk, as it introduces the possibility of losses that exceed a trader’s initial investment.
According to Nikkei, the FSA aims to protect investors from “an excessive amount of speculation and the risk of loss due to volatility”.
Some say introducing clear regulations on margin trading is urgent since 80% of crypto trades come from derivatives. Data from the Japan Virtual Currency Exchange Association (JVCEA) — the official self-regulatory organization for the crypto industry in Japan — shows that the volume of leveraged, margin and futures trading for crypto was far higher than that of spot trading in Japan from April 2017 to March 2018.
JVCEA enacted a leverage cap of 4x last year, leading some cryptocurrency exchanges in the country like Coincheck to reduce their rates. However, some economic experts have suggested that the rate should be further lowered to 2x in order to match those in other jurisdictions such as the European Union.