Under a margin trading service, registered traders could borrow money from the broker (exchange), in order to buy or sell more cryptocurrencies than they could afford on their own. The broker would demand collateral in exchange for the loan and this provision generally has an impact on a traders profit on a green market day.
For a red crypto market day, traders would struggle to make up for lost funds and this could become a problem for exchanges especially when margin trading has no official limits recognized by the exchanges.
According to a local Chinese media report, the JVCEA is considering the possibility of limiting the amount of fund that margin traders can borrow to four times the amount of their investment within a specified period.
“It (margin trade limit) aims to prevent investors from suffering a lot of losses due to sudden price fluctuation of the virtual currency,” the self-regulatory body said in the report.
To guard the proposed margin trading rule, the body announced that it will “establish rules concerning system security measures, advertisements, insider trading and so on” while also rolling out “transitional measures that allow the exchange operator to independently” set their desired margin trade limits.
In some special cases where “a loss beyond the amount deposited as collateral by the customer occurs,” exchanges that independently set their margin trading limits will be obliged to report to the Association.
The new margin trading limits could be rolled out on member exchanges within the next month if it gains support and will represent a major feat for the JVCEA which was inaugurated in late April to promote trustworthiness in Japan’s crypto industry.
The Japan Virtual Currency Exchange Association (JVCEA) comprises of two already existing regulatory agencies – the Japan Blockchain Association (JBA) and the Japan Cryptocurrency Business Association (JCBA). It holds the membership of the 16 licensed crypto exchanges operating in the Asian nation as well as licensed blockchain companies.