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Cryptocurrency

Japan clamps down on margin cryptocurrency trading

Exchanges that fail to register under incoming rules will be shuttered

Japan has one of the world's most advanced legal frameworks on cryptocurrency.   © Reuters

TOKYO -- Japanese financial authorities will expand on already pioneering rules for cryptocurrency trading to bring further order to one of the world's biggest virtual currency marketplaces.

The cabinet on Friday approved draft amendments to Japan's financial instruments and payment services laws, which would cap leverage in virtual currency margin trading at two to four times initial deposits. The new limits are in line with standards are similar to those in foreign exchange trading.

All cryptocurrency exchanges that handle margin trading will be required to obtain new government registration. This will be separate from an existing registry that focused mainly on cash platforms created in 2017, part of a first-of-its-kind legal framework that recognizes cryptocurrency as legal tender.

Cryptocurrencies once enjoyed glowing prospects as an innovative payment method, but their use in speculative trading has far outstripped this. Total margin trading in Japan reached 8.42 trillion yen ($75.6 billion) in December 2018, according to the Japan Virtual Currency Exchange Association, a self-policing body. That is roughly 11 times the scale of cash transactions, which came to 777.4 billion yen.

The lopsidedness has left some investors with paper losses. Earlier registration requirements, enforced by the Payment Services Act, were carried out to prevent money laundering.The new rules will require that cryptocurrency exchange operators be monitored in a way similar to securities traders to protect investors.

Furthermore, cryptocurrency operators will be divided into categories to distinguish those that engage in margin trading from those that issue tokens in initial coin offerings, for example. This is intended to protect investors from unsavory offerings that more closely resemble Ponzi schemes, and to encourage more legitimate companies to use offerings as fundraising tools.

The rules are to go into force in April 2020. Margin cryptocurrency exchange operators would need to be registered within 18 months of that date. Big-name brokerages looking to enter the game would likely need to re-register for that purpose.

The time limit would give the Financial Services Agency tools to crack down on unregistered "quasi-operators" that deal in cryptocurrency while their registration applications are awaiting approval. Tokyo crypto exchange LastRoots is currently operating despite not being on the existing registry, as is Rakuten Wallet, a Bitcoin platform owned by e-commerce provider Rakuten.

If the screening process drags on, quasi-operators essentially are able to do business like their registered peers in the meantime. "We intend to motivate operators to do what they can to become registered," said a senior FSA official.

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