Will the cryptocurrency powerhouse "Zipangu" regain its former power? Leverage reform is key

It may be hard to imagine that Japan once held dominance in the world of cryptocurrency. However, there was certainly a “golden country” called Zipangu.

Bitcoin (BTC) was born in January 2009. The following year, on May 22nd, the "Bitcoin Pizza Day" was celebrated, which is still talked about today, when 10,000 BTC was exchanged for two pizzas. It was also in this year that Mt. Gox, which became the center of the kingdom, began trading in Bitcoin.

Mt. Gox, which grew at a rapid pace under the leadership of the famous Mark Karpeles, became an "international trading port" where cryptocurrency users from all over the world trade. In 2013, it accounted for over 70% of the world's Bitcoin trading volume.

However, the company went bankrupt after the "Mt. Gox incident" came to light in 2014. At the exchange rate at the time, more than 47 billion yen in Bitcoin and customer funds were stolen, and it lost its value.

Mt. Gox had also experienced a large-scale hacking incident in 2011, and its management was also on the decline, so it is not difficult to imagine that it was a sinking ship. However, the collapse of the cryptocurrency following the hacking incident has tarnished public perception of cryptocurrencies, and ultimately Bitcoin.

The Financial Services Agency took this seriously and took strict measures, such as requiring cryptocurrency exchanges to register. This marked the birth of strictest cryptocurrency regulations in the world. This prompted a succession of startups to cancel their entry into the cryptocurrency industry. The restrictions then became even tighter, and before long users were drifting away from the domestic market.

According to the "Annual Report on Cryptocurrency Trading" for fiscal year 2022 (April 2022 to March 2023) published on September 29 by the Japan Virtual Currency Exchange Association (JVCEA), a self-regulatory organization for cryptocurrencies, the number of domestic cryptocurrency exchanges is on the rise, reaching 33. In addition, the number of new domestic stocks handled has also increased sharply to 19, and it can be said that the trading environment is improving for users overall.

On the other hand, leveraged cryptocurrency trading has continued to decline significantly since 2021. This is largely due to the legal reforms that came into effect in 2020.

In the first place, the maximum leveraged cryptocurrency trading ratio was 25x, the same as FX. However, in line with the rules set by JVCEA, the maximum ratio was changed to 4x across the board from 2019. It was then lowered to 2x by a legal amendment in 2020.

Leveraged trading, which allows users to move large amounts of money with a small amount of capital, is an attractive investment method for users. It is also an extremely important source of funds for exchanges that provide these services, as it can generate a lot of commission income. It was lowered from 25x to 2x in just two years. Furthermore, the sharp decline in trading volume is unbearable for both exchanges and users.

As dissatisfaction grew, industry groups finally made serious requests. On September 26, JCBA (Japan Cryptocurrency Business Association) officially submitted a request to JVCEA regarding the revision of the leverage ratio. The request stated that the specific ratio should be calculated based on the past volatility of each stock, and called for the discussion to be accelerated.

The movement of JCBA and JVCEA to revise the leverage ratio has already been reported in various media, so from another perspective, the submission of the request is a given. According to what JVCEA Chairman Genki Oda has said in Forbes and at industry events in the past, the organization hopes to raise the ratio to 4-10x as soon as possible, based on the requests of its members.

So why are they now so serious about amending the leverage rule? I think there are two main reasons.

The first is the operating situation of each cryptocurrency exchange.

As you know, the cryptocurrency market is still not as active as expected, and is being mocked as being in a "winter period."

Although prices have improved since the beginning of the year, it is not uncommon for them to remain flat since then, and just the other day, spot trading of Bitcoin hit its lowest level in about six years. As public interest in cryptocurrencies declines due to the slump in prices, the leverage market is steadily shrinking, which adds to the problem.

With this background, most domestic cryptocurrency exchanges, including major exchanges, are bleeding red ink. It's still better than that, as new transactions of cryptocurrencies, one of the valuable sources of revenue for exchanges, have now been relaxed. If regulations had remained strict, it could have been even more disastrous.

That's why they chose to amend the leverage rule.

As mentioned in the JVCEA document, the amount of spot cryptocurrency trading in 2022 was 7.169 trillion yen for Bitcoin. In contrast, leveraged trading recorded 12.8802 trillion yen. In other words, when it comes to Bitcoin alone, leveraged trading is the market where more money moves.

Looking at the past five years, the amount of leveraged trading is overwhelmingly higher than that of spot Bitcoin trading. Considering major events such as the approval of Bitcoin spot ETFs and the halving in the future, it is no exaggeration to say that focusing on this and revitalizing trading will determine the fate of improving each company's business.

(Quoted from JVCEA's "Annual Report on Cryptocurrency Trading")

The second is the improvement of the international presence of the Japanese market.

As mentioned in the JCBA document, Japan was a cryptocurrency powerhouse, accounting for about 50% of the world's share of Bitcoin trading volume in 2017. However, as of 2023, when leverage regulations were put in place and leverage rates were limited to 2x, leverage has fallen to only 1-3%.

(Quoted from JCBA "Request for Leverage Revision for Cryptocurrency Margin Trading")

In Japan, there is a movement to make Web 3.0 a national strategy, centered around industry groups, and this has been realized. From now on, it will be necessary for businesses to embody a high-level movement toward the spread of Web 3.0, but it is clear that no matter how hard we try in a market where there are currently no people, growth will be sluggish. If growth cannot be expected, it is natural that the government and politicians will eventually give up on us, and the future of the industry will become bleak.

Given that the public and private sectors have finally cooperated, the interest of large companies has increased, and a system has been established to promote Web 3.0, now is the time to strengthen our efforts to increase the number of participants in the domestic cryptocurrency market and regain the international initiative.

Japan has the advantage of having established cryptocurrency regulations before the rest of the world. Considering the current flurry of cryptocurrency regulation around the world, Japan is one of the few countries that can forge ahead.

From another perspective, if the domestic cryptocurrency market is not revitalized even though Web 3.0 has been made a national strategy, the government will lose face. For this reason, revitalizing the domestic cryptocurrency market and expanding its international influence can be considered a near "supreme command."

Many users should know that just because a request for leverage revision has been submitted, the ratio will not change immediately. Discussions will need to be deepened from here, and it will take some time before the ratio is actually revised.

The main focus of the discussion is "how high should the ratio be raised?" Some say that it will "settle at about 5 to 8 times" (a domestic cryptocurrency exchange official). The maximum ratio for FX is also 25 times, but in reality, it is said that it is often traded at about 6 to 8 times. Taking this background into account, it is expected that the focus will first be on bringing the ratio closer to the ratio actually used in FX.

Also, according to the aforementioned official, it seems that one mid-sized exchange was particularly vocal in taking the lead in amending the leverage ratio. Considering the wide range of requests from each company, adjustments will be made here first. After that, full-scale adjustments will be made with the relevant ministries and agencies.

Japan once led the cryptocurrency market. Now, the initiative has shifted to Europe and the United States. To turn Japan back into a "golden nation," it is first necessary to begin with system reforms directly linked to services, which are a little easier to implement than tax reforms. The current leverage reforms are one example of this.

It will be important to push through reforms with a sense of urgency in order to restore Japan to its position as a cryptocurrency powerhouse.

Images: Shutterstock, JVCEA, JCBA

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◉Shogo Kurobe
He entered the cryptocurrency industry in 2018. With experience studying writing and writing novels as a student, he is involved in writing, planning and editing articles on cryptocurrency and blockchain. He was appointed deputy editor-in-chief at J-CAM Co., Ltd. in April 2022, and is currently in his current position. He launched "Iolite" in March 2023.

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