FSA Releases Draft Report on Cryptocurrency Reform Bill for Submission to the Diet Next Year

The Financial Services Agency (FSA) has changed “virtual currency” to “crypto assets” and stated that it is difficult to ascertain the positive social significance (of cryptocurrency derivative trading) at present” in a publicly released draft report outlining cryptocurrency regulations that it presented at the 11th meeting of the Study Group on the Virtual Currency Exchange Services on December 14.

“Virtual currency” has been the Japanese translation used by the Financial Action Task Force and in various foreign laws and the like, and has come into general widespread use. However, recent international discussion, including at the G-20 meeting, has started to focus on the expression “crypto assets.” The FSA draft report states that Japan too will change the expression to “crypto assets” to come into line with the international standard, as well as to avoid confusion regarding the term “currency” with legal tender currencies such as the Japanese yen and U.S. dollar.

Chief Cabinet Secretary Yoshihide Suga told a news conference on December 17 that the expression “crypto assets” is becoming the global norm, including at the G-20. It has also been pointed out that using ‘currency’ invites misunderstanding with currencies when referring to legal tender,” he said, adding, “the FSA will respond properly, taking into account discussions within the Study Group.”

According to the draft report, while derivative trading in cryptocurrencies accounted for approximately 80% of cryptocurrency trades in 2017, there has been many consultations between cryptocurrency exchange users and the agency on the inadequacy of exchange operators’ systems and ambiguity of service content for derivative trading.

The report also indicated that derivative trading in cryptocurrencies is subject to financial regulation in many other countries, however, it is not yet subject to regulation in Japan. Furthermore, the agency wrote 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.” The agency also stated, “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).”

On margin rate magnification in margin trading, the agency wrote, “Under present conditions, there are (cryptocurrency exchange) operators that offer leverage of 25 times at maximum. However, considering cryptocurrency value fluctuations are much greater than legal tender, we believe it would be suitable to set an appropriate ceiling in accordance with the actual situation.” In consideration of the social significance of derivative trading, the report further clarified, “At this juncture, we cannot recognize the necessity of handling (cryptocurrency derivative trading) in the same way as financial instruments exchanges and other locations, which allow trade through a majority of market participants.”

The draft report from the 11th meeting of the Study Group on the Virtual Currency Exchange Services also touches on derivative trading in cryptocurrencies and response to cash outflows from cryptocurrency exchange operators. The draft bill on cryptocurrencies, including the change in expression, is forecast to be submitted as soon as the regular session of the Diet next year.

*This article was written by Fisco