Japan Cryptocurrency Business Association Proposes Review of Leverage Ratio in Crypto Margin Trading
The Japan Cryptocurrency Business Association (JCBA) has submitted a proposal to the Japan Virtual Currency Exchange Association (JVCEA) to reevaluate the leverage ratio in cryptocurrency margin trading. The JCBA argues that the current ratio is too restrictive compared to other derivative markets and suggests implementing a calculation method based on past price volatility. They have sought cooperation from the JVCEA to make this amendment proposal a reality.
Previous Leverage Ratio Changes
In the past, individual trading in cryptocurrency margin had a maximum leverage of 25 times, similar to the domestic Forex market. However, it was reduced to four times in October 2019 and further lowered to two times in May 2020 following amendments to the Financial Instruments and Exchange Act.
Advocating for a Uniform Method
The JCBA is advocating for the application of a method used for corporate transactions, which calculates leverage based on past weekly price fluctuations of individual stocks, to be applied to individual transactions as well. Currently, corporate leverage ranges between four to nine times.
Trend Towards Volatility Stabilization
Since the peak in early 2018, price fluctuations in cryptocurrencies have decreased along with a decline in speculative elements. Japan has seen progress in establishing stablecoins and tax systems while regulations on leverage trading have remained unchanged since 2019. The JCBA emphasizes the need to develop the derivative market alongside the spot market to recognize cryptocurrencies as a formal asset class and attract users back to Japan.
Impacts of Reduced Leverage Ratios
The reduction in leverage ratios has led to a significant decrease in trading volume and open interest, particularly in cryptocurrency margin trading compared to spot trading. This has resulted in financial instability for domestic exchanges and individual investors seeking high-leverage exchanges abroad. The JCBA highlights that individuals tend to restrain risk, with effective leverage being kept at four to five times.
Review Process
The proposals by the JCBA will undergo a review within the certified self-regulatory organization, JVCEA, and relevant parties. The JVCEA holds the position of a certified self-regulatory organization under the Payment Services Act and the Financial Instruments and Exchange Act.
Hot Take: Adjusting Leverage Ratios for Crypto Margin Trading in Japan
The Japan Cryptocurrency Business Association is pushing for a review of leverage ratios in cryptocurrency margin trading. They argue that the current ratios are overly restrictive and propose a calculation method based on past price volatility instead. This move aims to align Japan’s cryptocurrency market with other derivative markets and attract users who have sought higher leverage on overseas exchanges back to Japan.
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