Japan weighs loosening crypto leverage rules: What’s driving the debate?
Japan is edging toward a significant shift in how its crypto markets operate, as policymakers openly discuss easing the country’s strict 2x leverage cap on digital asset trading. The move would mark another step in a broader, carefully managed transformation of Japan’s regulatory framework for cryptocurrencies, bringing it closer in line with rules for traditional financial products.
The current discussion was triggered by comments from Seiji Kihara, a senior member of the ruling Liberal Democratic Party and head of the party’s Next Generation AI and On-Chain Finance Project Team. Speaking at a financial conference in Tokyo on July 14, Kihara argued that the existing leverage limit-set at twice the margin posted by traders-is “too strict” and is hampering the growth and efficiency of Japan’s crypto market.
Kihara’s core argument is that markets cannot function properly without sufficient liquidity and effective price discovery. In his view, the 2x leverage ceiling constrains trading volumes, discourages active participants, and ultimately undermines the ability of the market to reflect fair prices. If Japan wants to position itself as a serious global hub for digital assets, he suggested, easing leverage restrictions is a “natural” and necessary evolution.
Today, Japan’s leverage cap is among the tightest of any major crypto jurisdiction. Leveraged trading in crypto allows investors to borrow funds using their own capital as collateral, enabling them to open positions that exceed the actual amount of cash they hold. While leverage amplifies both gains and losses, it also boosts trading activity and deepens order books-key ingredients for markets that institutional players and sophisticated traders are willing to engage with.
Kihara’s project team is actively working on policy proposals that would recalibrate these constraints. According to reports, one of the driving goals is to lure capital back into Japan’s domestic crypto markets. Over recent years, some Japanese traders and institutions have shifted activity offshore, partly due to stricter leverage rules and a regulatory framework that historically treated crypto as a payment tool rather than a financial product.
Although Kihara outlined the intended direction of reform, no concrete timetable has been made public for when revised leverage rules might be introduced. That uncertainty reflects Japan’s broader approach: reform is moving steadily but cautiously, with officials intent on balancing innovation with consumer protection and systemic risk controls.
The leverage debate is unfolding in parallel with sweeping legal changes that are redefining how crypto fits into Japan’s overall financial architecture. Earlier this month, Japan enacted amendments to the Financial Instruments and Exchange Act (FIEA), a cornerstone law for securities and investment products. Under these changes, cryptocurrencies are now classified as financial products, rather than being treated primarily as instruments under the Payment Services Act.
This reclassification is more than a semantic shift. It subjects digital assets to a regulatory regime closer to that applied to stocks, bonds, and other investment instruments. Among other things, the amendments introduce formal insider trading rules for crypto transactions, an area that had been a gray zone. Issuers of certain crypto assets will now be obliged to provide annual disclosures, improving transparency for investors and regulators alike.
Penalties for operating outside the legal framework have also been toughened. The maximum prison sentence for running an unregistered crypto business is being raised from three years to 10 years, while the potential maximum fine will climb from 3 million yen to 10 million yen. These harsher sanctions signal that Japan expects crypto intermediaries to adhere to the same level of compliance expected in traditional finance.
On the tax side, the same legal package lays the groundwork for separate taxation of crypto gains at an effective rate of about 20%, with a three-year loss carry-forward provision. In practical terms, this would bring the tax treatment of crypto investments closer to that of other financial instruments and could remove a significant barrier that has historically discouraged domestic investors from holding and trading digital assets over the long term. The new tax rules are expected to come into effect in January 2028, with enforcement scheduled for the 2027 fiscal year.
Even though cabinet ordinances and detailed supervisory guidelines have yet to be finalized, the amended law has created a clear legal foundation for future reforms. Regulators now have an explicit mandate to craft more nuanced rules for investment products built on crypto, including exchange-traded funds and other pooled vehicles.
One of the most closely watched outcomes of these changes is Japan’s path toward launching domestic cryptocurrency exchange-traded funds. Regulators are preparing revisions to investment trust rules that would allow ETFs and other investment trusts to hold cryptocurrencies directly, rather than only via derivatives or indirect exposure. Industry expectations suggest that the first domestic Bitcoin ETF could appear as early as 2028, once all regulatory adjustments and tax clarifications are in place.
The legal amendments do not automatically authorize such ETFs. Instead, they establish the framework within which future rules will be written. The Financial Services Agency still needs to define how investment trusts can safely custody crypto assets, manage volatility, and protect investors. Only once those rules are finalized will asset managers be able to formally file and launch products that directly invest in digital assets.
Hiroki Yamamichi, the chief executive of Japan Exchange Group, has previously indicated that a crypto ETF becomes realistic only after both the legal structure and the tax regime are clear and fully implemented. That sequencing underscores how closely linked Japan’s leverage, taxation, and product-approval discussions have become: each piece needs to support a coherent market structure.
Despite the remaining hurdles, multiple large financial institutions are already preparing for a future in which crypto is integrated into mainstream investment offerings. Major securities firms and asset managers in Japan-among them SBI Securities, Rakuten Securities, Nomura, Daiwa, and Asset Management One-have been exploring product concepts and infrastructure upgrades in anticipation of looser restrictions and rising investor demand.
Against this backdrop, the debate over leverage is not an isolated technical tweak. It’s part of a coordinated effort to transform Japan’s crypto market from a tightly constrained, retail-centric space into a more sophisticated ecosystem that can attract institutional liquidity, support complex products, and compete with global financial centers.
From a policy perspective, the leverage discussion sits at the intersection of three key objectives:
1. Market competitiveness
Japanese regulators and lawmakers are increasingly concerned that overly restrictive rules push innovation and trading activity overseas. Relaxing leverage limits-within a robust risk management framework-is seen as one lever to make domestic venues more attractive compared to foreign exchanges that offer higher leverage and a broader range of products.
2. Investor protection and systemic stability
At the same time, officials are acutely aware of the risks associated with excessive leverage, particularly in a market as volatile as crypto. Sudden price swings, cascading liquidations, and platform failures have all been visible in global markets. The challenge for Japan is to find a level of permitted leverage that supports liquidity and efficient prices without inviting reckless speculation and destabilizing events.
3. Regulatory harmonization
By moving crypto into the FIEA framework and planning specialized tax rules, Japan is signaling that it wants digital assets treated on par with other financial instruments-both in opportunities and in obligations. Adjusting leverage rules is one way to harmonize how risk is managed across asset classes, rather than regulating crypto in a silo under payment-focused laws.
For domestic traders, any relaxation of the 2x cap would likely lead to more dynamic order books and narrower spreads on Japanese exchanges. Professional and algorithmic traders, who often rely on leverage to execute market-making strategies, could return or scale up activity, deepening liquidity across trading pairs. Over time, that could improve the overall trading experience, including for retail participants who do not use leverage themselves.
However, broader access to leverage also demands stronger education and clearer risk disclosures. If leverage limits are raised, regulators and platforms will need to ensure that retail users understand that borrowing magnifies not only potential profits but also losses. Margin calls, forced liquidations, and rapid drawdowns are an inherent part of leveraged trading, especially in markets that can move double digits in a single day.
For international investors and institutions, Japan’s evolving stance may signal that the country is positioning itself as a more open, yet still tightly supervised, hub for digital assets in Asia. A combination of clear legal status, standardized taxation, potential Bitcoin ETFs, and more market-friendly leverage rules could make Japanese platforms and products more attractive compared to jurisdictions where regulation remains ambiguous.
There is also a strategic dimension to Japan’s broader Web3 and digital asset strategy. The government has consistently emphasized its interest in blockchain, tokenization, and next-generation financial infrastructure. By refining crypto rules, enabling institutional-grade products, and considering more flexible leverage, Japan is laying groundwork not just for speculative trading, but for a wider tokenized financial ecosystem that could include tokenized securities, stablecoins, and on-chain financial services.
In practical terms, the next few years will likely be a transitional period. Policymakers will be drafting secondary regulations, consulting with industry, and observing global developments-from Bitcoin ETF growth abroad to new standards in custody and risk management. During this time, leverage rules may be adjusted gradually rather than in a single dramatic step, allowing regulators to monitor market reactions and fine-tune thresholds.
Ultimately, Japan’s consideration of higher crypto leverage limits is best understood as part of a methodical restructuring of its entire approach to digital assets. Instead of treating crypto as a fringe payment tool, the country is integrating it into its mainstream financial system-with tougher enforcement, clearer taxation, better investor protections, and, potentially, more flexible market mechanics. How it balances these competing priorities will determine whether Japan becomes a leading, stable hub for digital assets or cedes that role to more aggressive but less regulated markets.