Japanese crypto regulations to tighten

At the 11th meeting of the Virtual Currency Exchange Services Study Group on December 14th, the Japanese Financial Services Agency (FSA) presented a draft report outlining potential new cryptocurrency regulations in the country.

The report proposed the regulation of cryptocurrency derivative trading, and the changing of the terms "virtual currency" to "crypto assets", in line with the international standard.

"Virtual currency" is the usual Japanese translation of cryptocurrency that is used in the country by both local agencies like the Financial Action Task Force and those involved with international legislation.

Although the wording might seem trivial, different designations carry different implications for the legal classification of cryptocurrencies, and impact how they are perceived. Recent discussions on the international stage — including at the G20 meeting — have started to use the term "crypto assets" to describe cryptocurrency. This was pointed out at a news conference on December 17th, by Chief Cabinet Secretary Yoshihide Suga, who said that the FSA would now start to use the term "crypto assets" in accordance with the global norm.

Along with helping international cooperation, this measure is also expected to prevent confusion over the word currency as it relates to national legal tender like the Japanese yen and US dollar, which have reportedly been mixed up with cryptocurrencies by traders in the country.

Tightening up on derivative trading regulation

Elsewhere, the report examines derivative trading in Japan, and finds that despite accounting for 80 percent of cryptocurrency trades in 2017 (an estimated $543 billion) derivative trading is serviced by inadequate exchange operators.

Despite Japan’s proactive regulatory approach, the country doesn’t yet have regulations in place to govern derivative trading in cryptocurrencies — a situation which now looks set to change. The report also further questions the "social significance" of crypto derivative trading, stating that "there is no precise evaluation regarding the usefulness of cryptocurrency as an underlying asset, and its usefulness is being exacerbated exclusively by speculation. Thus, it is difficult to ascertain the positive social significance (of cryptocurrency derivative trading) at present."

Last year, Japan’s FSA considered lowering the limit on the leverage available to Forex traders to 1:10 from the level of 1:25 which was set after the 2008 financial crisis. This never came to fruition, but the FSA now looks set to introduce an even tighter cap on cryptocurrency derivative trading, which is currently held to the same 1:25 standard — a number which the report suggests doesn’t take into account the high volatility of the asset class.

"At the very least, we believe it is fundamental that the same business regulations for other derivative trading should be applied (to cryptocurrency derivative trading," the report said.

Although this reform would make the limitations on leverage official, such measures have already been enforced by the Japanese Virtual Currency Exchange Association (JVCEA). This self-regulatory body, which consists of representatives from the country’s licensed crypto exchanges, enforced a 1:4 limit on margin trading for licensed exchanges in July 2018.

The completed cryptocurrency reform bill is expected to be submitted to the Diet (Japanese parliament) later this year.