Japan’s Financial Services Agency (FSA) will impose a 2x margin limit on crypto trading. This will be effective from spring this year.
Margin trading is available to retail investors, many of which are not professional traders. As such, it comes with significant financial risk, and some would argue that this move is long overdue.
However, nanny-state policies, such as this, only highlight how regulatory influence can limit development within the space. This is because margin trading and volume are strongly correlated, meaning, such a move will have the effect of reducing exchange volume.
The Enticement To Get Rich Quick With Crypto Margin Trading Is High
There’s no doubt that crypto margin trading is an enticing proposition for traders. Part of the reason why is due to the massive margins available to everyday people, like you and me.
For example, Binance, the world’s largest exchange by volume, offers up to 125x margin – the highest available in the industry. But it’s not unusual for leverage exchanges, such as ByBit and BitMex, to offer a 100x leverage.
And with the enticement to “get rich quick”, margin trading has attracted the attention of authorities for all the wrong reasons. So much so that the UK’s Financial Conduct Authority (FCA) is mirroring moves by Japanese authorities on the basis of crypto-derivatives trading being illegal gambling.
The UK’s FCA See Crypto Trading As Gambling
The UK’s financial regulator, the FCA, think crypto-derivative trading is inappropriate for retail investors.
As a result, according to The Economist, the FCA is looking to ban retail investors from trading crypto-derivatives.
The main reason cited comes down the complexity of crypto-derivatives, which many amateur traders fail to understand fully. Therefore exposing themselves to a greater chance of loss.
“Now the Financial Conduct Authority (FCA), a British watchdog, is proposing a blanket ban on selling crypto-derivatives to retail investors. A consultation ended on October 3rd. Its decision is expected in early 2020.”
The distinction between investing and gambling is a fine one. But the FCA has clearly stated guidelines that help differentiate between the two. And what that comes down to is what they have termed “outcome distributions.”
“The outcomes distributions for these basic products can be theoretically modelled showing the outcomes for 100 typical consumers who spend £100 on each product and comparing it to another 100 people who don’t buy the product and simply keep their cash under the mattress.”
Exchange Volume Will Suffer
All the same, many would deem regulatory limitations on crypto trading as overkill. While the FCA and FSA would argue that they are protecting investors, the fact remains that people should have the right to choose.
Indeed, by imposing a cap on leverage, or stopping retail investors trading crypto-derivatives, the outcome will only halt growth within the crypto sector.
Japan’s largest exchange, BitFlyer actioned a 4x margin limit as part of a gentleman’s agreement with the FSA. Average volumes nose-dived as a result.
Volumes are mostly a function of leverage – see what Bitflyer's did last year when the FSA reduced max leverage from 15x to 4x on the 28th of May pic.twitter.com/eGa9VCFiKx
— skew (@skewdotcom) January 13, 2020
And there is a real fear that a 2x limit imposition would cut volumes further. Might this be the death knell to an industry already struggling to beat the bears?
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