Tag: OKEX

Crypto collapse: New Sam Bankman-Fried charge, Binance fallout, SEC sues exchange over crypto securities, how Signature died

  • By Amy Castor and David Gerard

“who needs an examiner when you can just hand sam an empty sheet of paper and wait”

— haveblue

Sam is a growing boy, he needs his crimes

A new superseding indictment against FTX founder Sam Bankman-Fried alleges that he paid Chinese officials $40 million in crypto in a bribe to unfreeze $1 billion in crypto on Alameda — which would violate the Foreign Corrupt Practices Act. Sam now faces 13 criminal counts. [Superseding indictment, PDF]

On Thursday, March 30, Sam took a trip to New York and pleaded not guilty to his latest five charges. He had to battle his way through a gaggle of reporters just to get in the door. At least it got him out of the house. [Twitter; YouTube; NYT]

In early 2021, China froze $1 billion of cryptos in various Alameda accounts on two of the country’s biggest crypto exchanges (which aren’t named in the indictment). Bankman-Fried “understood that the Accounts had been frozen as part of an ongoing investigation of a particular Alameda trading counterparty.” A bribe was sent from Alameda to a private blockchain address in November 2021. The accounts were unfrozen shortly after, and Alameda got its cryptos back.

Somehow, Daniel Friedberg, FTX’s chief counsel at the time knew nothing of this. Friedberg said in an affidavit dated March 19, 2021, when the FTX Arena naming rights deal was going through, that FTX and its affiliated companies “do not have any ownership or contracts or any other obligations with respect to any governmental agency of the People’s Republic of China, or any governmental agents or political persons.” [Miami-Dade Legislative Item, PDF, p. 54]

Sam will be kept on a very short leash while he’s out on bail. Sam gets a non-smartphone that only does voice and SMS — no internet access — and a locked-down laptop configured to access only certain websites. He can work with his lawyers, order food from DoorDash, and keep up with the sportsball. YouTube is also on the list, so we’re looking forward to the 10-hour video blogs detailing crimes hitherto unknown to humanity. [Order, PDF]

Sam’s father, Joseph Bankman, is paying his son’s lawyer fees with over $10 million that Sam borrowed from Alameda and gave to his father as a present in 2021. We wonder if John Jay Ray is going to come calling to claw this back for the bankruptcy estate. [Forbes]

In the FTX bankruptcy, a group of ad-hoc FTX creditors with $2 billion in claims want to participate in the bankruptcy without revealing their identities. They include “large institutional market makers and asset managers.” This is the precise sort of creditor that the Bankruptcy Act is not intended to protect from public scrutiny. [Doc 1137, PDF]

FTX appears to have been hiding money under the names of employees. The OKX exchange, formerly OKex, has agreed to turn over $157 million in FTX funds. $150 million of that was in an account of a former FTX employee. The ex-employee says the account was opened on behalf of Alameda. He has agreed to forfeit the assets. [Doc 1189, PDF; Doc 1190, PDF]

Binance: This is fine

The CFTC lawsuit against Binance, which we covered in detail on Tuesday, has rattled customers. Within days, the exchange saw outflows of $2 billion, out of a claimed reserve of $63.2 billion, according to Nansen. Currently, 28% of Binance reserves are in Tether and 10% are in BUSD. [WSJ, paywalled; Nansen]

The three large US hedge funds trading on Binance weren’t named in the CFTC complaint — though Radix Trading later came forward and said that they were “Trading Firm A.” Radix insists they did nothing wrong — they ran their apparent conspiracy to violate commodities laws past their in-house legal team, after all. [WSJ, paywalled]

But the CFTC complaint has “already sent chills” across the commodity trading industry — particularly firms who make their money from real commodity trading and only dabble in the toxic waste barrel of crypto. Market makers are wondering if they’re risking their own broker-dealer licenses. [Bloomberg]

Cash withdrawals from Binance US are no longer working via ACH through Signature. Binance says: “ACH deposits and withdrawals for a small subset of our users were disrupted last week and, out of an abundance of caution, remain paused. Our teams are working through this transition and expect to restore functionality within the next 24 hours.” It’s probably fine. Your funds are safe. [Reddit]

You’ll be shocked to hear that Binance kept substantial business links to China for years after its claimed 2017 exit, despite Binance executives repeatedly saying otherwise. [FT]

The Block reported in 2019 that Binance had offices in Shanghai. CZ hit the roof and threatened to sue them, with the explicit aim of outspending them on lawyers … and The Block stood by its story. (Ben Munster, then of Decrypt, helped with the response story, though The Block took out Ben’s harsher additions.) [The Block, 2019; Twitter, archive; Twitter, archive; The Block, 2019]

The sale of Voyager Digital to Binance US is on hold. The Department of Justice and the US Trustee appealed the sale on the basis that the order granted inappropriate immunity from prosecution, and asked for a stay. The appeals court has granted the request for a stay while the appeal proceeds. [Doc 1222, PDF; Doc 1223, PDF; Bloomberg]

Be your own Signature Bank

In his statement on the recent bank failures and the federal regulatory response, FDIC Chairman Martin Greunberg explained why Signature failed: the bank was insolvent, contrary to Barney Frank’s claims. [FDIC, PDF]

On March 10, Signature Bank lost 20 percent of its total deposits in a matter of hours, depleting its cash position and leaving it with a negative balance with the Federal Reserve as of close of business. Bank management could not provide accurate data regarding the amount of the deficit, and resolution of the negative balance required a prolonged joint effort among Signature Bank, regulators, and the Federal Home Loan Bank of New York to pledge collateral and obtain the necessary funding from the Federal Reserve’s Discount Window to cover the negative outflows. This was accomplished with minutes to spare before the Federal Reserve’s wire room closed. 

Over the weekend, liquidity risk at the bank rose to a critical level as withdrawal requests mounted, along with uncertainties about meeting those requests, and potentially others in light of the high level of uninsured deposits, raised doubts about the bank’s continued viability. 

Ultimately, on Sunday, March 12, the NYSDFS closed Signature Bank and appointed the FDIC as receiver within 48 hours of SVB’s failure.

The FDIC has told crypto clients with deposits at Signature Bank that they have until April 5 to close their accounts and move their money. The FDIC is looking to sell off Signature’s Signet inter-crypto-exchange dark liquidity pool. [Bloomberg]

Frances Coppola explains precisely what happened at Signature. [Coppola Comment]

We noted previously how larger US banks don’t want to go within a mile of crypto. But some smaller banks are still feeling lucky. [WSJ, paywall]

The SEC shuts down Beaxy

The Beaxy crypto exchange shuttered after the SEC filed charges against it for failing to register as a national securities exchange, broker, and clearing agency, and over its 2018 ICO. The SEC also charged a market maker operating on Beaxy as an unregistered dealer. [SEC press release; complaint, PDF; CoinDesk]

Beaxy ran a “private sale” ICO for its internal exchange token BXY from May 2018 to June 2019. The SEC is charging Beaxy and its founder Artak Hamazaspyan over the ICO as an unregistered offering of securities to US retail.

That’s the sort of complaint we’re used to seeing from the SEC — but they’re also charging Windy Inc., who ran the Beaxy platform, and Windy’s founders, Nicholas Murphy and Randolph Abbott, over unregistered securities trading on the exchange.

If cryptos being traded are securities — and it’s likely that most are — that leaves even the normal activities of an exchange subject to a vast array of additional regulations.

The SEC is also charging Brian Peterson and Braverock Investments as unregistered dealers for market-making on Beaxy for the BXY and Dragonchain DRGN tokens. The SEC sued Dragonchain in August 2022, alleging that DRGN was an unregistered offering of securities; that case is proceeding. [SEC, 2022; case docket]

Hamazaspyan is also alleged to have misappropriated $900,000 from the ICO for his own use. Murphy and Abbott discovered this in October 2019 and convinced Hamazaspyan to pay back $420,000 to Beaxy and let Windy run Beaxy going forward.

Windy, Murphy, Abbott, Peterson, and Braverock settled, paying a total penalty between them of $228,579. The SEC case against Beaxy and Hamazaspyan over the ICO is proceeding.

Beaxy shut down on Tuesday, March 28, owing to “the uncertain regulatory environment surrounding our business.” We think it’s deadly certain. [Beaxy, archive]

This is the first SEC action over securities trading on an exchange. It’s a likely template for future SEC cases against other crypto exchanges — like, say, Coinbase.

The Coinbase employee convicted in a criminal case of wire fraud by insider trading is fighting an SEC civil case claiming that the insider-traded tokens were securities. [WSJ]

SEC chair Gary Gensler will be testifying before Congress on April 18. The very non-partisan committee announces that “Republicans will hold @GaryGensler accountable for his flagrant disregard for the law, jurisdiction, and the APA.” (The Administrative Procedure Act.) We hope the Blockchain Eight show up. [Twitter]

More good news for decentralization

Judge Larry Alan Burns of the Southern District of California has denied the motion to dismiss of members of the bZx DAO who held governance tokens (BZRX), finding the DAO is plausibly alleged to be a general partnership. [Order, PDF; CoinDesk]

One of the earliest objections to the original DAO in 2016 was that it would be a general partnership, leaving everyone involved jointly and severally liable. (This is why incorporation is a thing.) The same problem was frequently noted in the rise in DAOs in the recent crypto bubble. Nobody involved can claim they had no idea.

Regulatory clarity, European style

The European Banking Authority has a new consultation paper on anti-money laundering (AML) risk factors that national bank regulators should consider. Crypto-asset providers are listed as an area that regulators should examine closely, including if “Distributed Ledger Technology” is “essential to the sector’s business model and operation” or “where services of the subject of assessment are provided using DLT or blockchain technology.” Comments are due by June 29, 2023. [EBA, PDF]

Coming soon in European AML: no anonymous crypto payments in the EU of over 1,000 EUR. Crypto asset managers will be required to verify “their customers’ identity, what they own and who controls the company.” [EP]

Terra-Luna

After he was arrested last week, Do Kwon of Terraform Labs is serving time in a Montenegrin prison. Kwon is likely to stay in jail there for at least a year, while his appeals and extradition hearings proceed. We expect he’ll be sent to South Korea first, and only then to the US. [YNA, in Korean; Protos] 

South Korean prosecutors are making another effort to arrest Terraform Labs cofounder Daniel Shin, who left the company in March 2020. [Bloomberg]

MicroStrategy doubles down 

As part of winding the bank down, Silvergate struck a deal with MicroStrategy to accept $161 million to repay a $205 million bitcoin-backed loan — taking a $44 million loss. Silvergate had said repeatedly that its bitcoin-backed loans were safe. [WSJ, paywall]

MicroStrategy sold 1.35 million shares of MSTR in Q1 2023, diluting shareholders by over 10% to pay off its Silvergate loan — and bought $150 million more BTC between February 16 and March 23. This is a Hail Mary pass praying for number to go up, which it is quite unlikely to do. [8-K; Twitter]

More good news for bitcoin

Hindenburg Research’s latest short-seller report is on Jack Dorsey’s Block, formerly Square. Cash App’s growth is aimed at targeting the “unbanked” — which mostly means embracing noncompliance to grow its user base. A Cash App employee told Hindenburg, “every criminal has a Square Cash App account.” And this is before Block has even got into crypto in any substantial way. [Hindenburg]

Indicted crypto promoter Guo Wengui used his culture-war social network Gettr to pump cryptos. Wengui was fined a billion dollars by the SEC in 2021 over his crypto offerings. [Washington Post]

The British Virgin Islands has ordered Three Arrows Capital founders Zu Shu and Kyle Davies to attend an examination on May 22 or be in contempt of court. We’re sure they’ll be right on that. [CoinDesk]

Freeing yourself from fiat history

If you click on a lot of old links to theblockcrypto.com, it’ll tell you that The Block has “sunset our News+ product” — their previous paywalled news offering. They didn’t open up those old pages — they’ve just effectively deleted a whole swathe of their journalism from 2018 to 2020!

We discovered this when Amy went looking for one of her old Block pieces on Binance for our article on Tuesday and when David looked for various other Block articles for today’s story.

You’d think a publisher wouldn’t just trash their own search optimization — but in practice, both mainstream and specialist publications destroy their own URLs and content all the time. So it’s pretty likely this was an error. Hopefully a reversible one.

We remember when Decrypt moved their domain from decryptmedia.com to decrypt.co. They saw their Google hits go through the floor and thought they’d been shadowbanned … not realizing they’d done it to themselves. The Block changed its URL to theblock.co around the same time, with similar effects.

In the meantime: ARCHIVE EVERYTHING. Stuff that’s blocked from the Internet Archive saves just fine into archive.is, and archive.is also accepts pages from the Internet Archive, Google cache, and Bing cache and indexes them correctly under the source URL. David uses and recommends the Get Archive extension for Firefox. [Mozilla Add-Ons]

Posted on by Amy Castor 0

News: BTC moons, Reggie Fowler stiffs lawyers, OKEx withdrawals still frozen, Binance gets piles of USDT

Bitcoin broke $16,000 on Thursday. That’s up from $10,000 in early September. And yet, with all the media outlets rabidly covering the latest “Bitcoin bull run,” the only one mentioning the billions and billions of dollars worth of tether (USDT) entering the market was Cointelegraph. 

In particular, none of the mainstream press has bothered to mention tether in their writings about BTC’s recent price rise. This is worrisome because retail folks — the ones most vulnerable to risky investments — have little understanding of tether and the risk it imposes on Bitcoin’s price. 

Instead, most media pointed to the election, PayPal’s recent embrace of crypto and huge BTC investments by MicroStrategy and Square as the reasons for BTC’s moon. Mainstream adoption! Institutional money! The truth is, crypto markets are easy to manipulate. And when BTC goes up in value like this, the main benefit is so early investors can cash out. 

In other words, BTC gets passed on to the next bright-eyed, bushy-tailed dupe who hopes the price will continue skyward. History has shown, however, these bubbles are generally followed by a crash, and a lot of people getting hurt, which is exactly what happened in 2018.

Trolly McTrollface (not his real name, obvs) points out in a tweet thread that Tether went into hyperdrive in March to stop BTC from crashing. BTC had dropped to $5,000, losing half its value from two months prior. In fact, March is when BTC entered its current bull run phase.

Remember, if the price of BTC falls too low, the network’s miners — who are responsible for Bitcoin’s security — can’t make a profit, and that puts the entire network in danger.

Trolly believes the current price pump is a coordinated effort between Tether — which has now issued a jaw-dropping $18 billion worth of dollar-pegged tethers — and the exchanges.

Let’s talk about some of those exchanges.

OKEx withdrawals still frozen

Withdrawals from OKEx, one of the biggest crypto exchanges, have been frozen ever since the news came out that founder “Star” Xu was hauled away for questioning by Shanghai authorities more than a month ago.

Xu’s interrogation appears to be part of a broader crackdown on money laundering in China, though OKEx denies any AML violations. 

OKEx is registered in Malta, but retains offices in Shanghai and Beijing, where it facilitates peer-to-peer—or “over-the-counter”—trades. The exchange acts as an escrow to reduce counter-party risk in fiat-to-crypto trades, so you don’t have to worry about someone disappearing with your cash before they hand over the BTC you just bought from them.

As Wolfie Zhao explains for the Block, these OTC trades are the only fiat on/off ramp for Chinese crypto traders—and have been ever since September 2017 when the country banned crypto trading on exchanges.

Effectively, the government made it so the exchanges could no longer get access to banking in the country.

P2P allows two people to transact directly, thus bypassing the Chinese ban, as long as the trades are small in scale. All Chinese crypto-to-fiat is OTC, while crypto-to-crypto trades are still done via a matching order book. (A Chinese citizen simply needs to use a VPN to access Binance, for instance.)

Currently, the OTC desk is the only trading desk that remains open at OKEx All of its exchange trading activity has been ground to a halt. The exchange claims Xu has access to the private keys needed to access its funds, and until he is free, all that crypto sits locked in a virtual vault.

As a result, according to blockchain analytics firm Glassnode, there are currently 200,000 bitcoin stuck on OKEx. The exchange insists all funds are safe, and says, essentially, that everything will be fine as soon as Xu returns. But its customers remain anxious. Did I mention OKEx is a tether exchange?

Huobi, another exchange in peril?

Like OKEx, Huobi is another exchange that moved its main offices out of China following the country’s 2017 crackdown on crypto exchanges.

Huobi, now based in Singapore, continues to facilitate fiat-to-bitcoin and fiat-to-tether trades in China behind an OTC front. (Dovey Wan does a nice job explaining how this works in her August 2019 story for Coindesk.)

Since earlier this month, rumors have circulated that Robin Zhu, Huobi’s chief operating officer, was also dragged in for questioning by Chinese authorities. Huobi denies the rumors.

Meanwhile, since Nov. 2—the day Zhu was said to have gone missing —$300 million worth of BTC has flowed from Huobi to Binance, according to a report in Coindesk. (I still don’t have a good explanation as to why Huobi is doing this. If anyone can fill in the gaps, please DM me on Twitter.)

What’s up with Binance?

If you follow Whale Alert on Twitter, like I do, it’s hard to ignore the enormous influx of tether going into Binance multiple times a day.

Here’s an example: On Friday, in four separate transactions, Tether sent Binance a total of $101 million worth of tethers. The day prior to that, Tether sent Binance $118 million in tethers, and the exchange also received $90 million worth of tethers from an unknown wallet. And on Wednesday, Tether sent Binance $104 million in tethers.

That’s over $400 million worth of dubiously backed tethers—in three days.

Like Huobi and OKEx, Binance also has roots in China. And it has an OTC desk to facilitate fiat-to-crypto trades. Is it a coincidence that the top tether exchanges originate from China? And that China controls two-thirds of Bitcoin’s hash rate?

Reggie Fowler’s lawyers wanna quit

Reggie Fowler, the Arizona businessman in the midst of the Crypto Capital scandal, is running low on cash. His lawyers have decided they don’t do pro bono work, so now they want to drop him as a client.

Last month, Fowler’s legal team asked the court to change his bond conditions to free up credit. But apparently, that isn’t working. Unfortunately, all this is happening just when there was a possibility of negotiating another plea deal. (Read my blog posts here and here.) 

Quadriga Trustee releases report #7

EY, the trustee handling the bankruptcy for failed Canadian crypto exchange QuadrigaCX, released its 7th Report of the Monitor on Nov. 5.

According to the report, EY has received 17,053 claims totaling somewhere between CA$224 million and CA$290 million—depending on what exchange rate EY ends up using to convert the USD and crypto claims to Canadian dollars for disbursement.

EY has CA$39 million ready to distribute to affected Quadriga users, who submitted claims. But none of that money is going anywhere until the Canadian Revenue Agency finishes its audit of the exchange. (Ready my blog post for more details.)

Gensler goes to Washington

Gary Gensler has been picked to lead President-elect Joe Biden’s financial reform transition team. As Foreign Policy notes, Gensler, who was the head of the CFTC during the Obama years, is an aggressive regulator.

He is also well familiar with the world of crypto. He taught a course on blockchain at MIT Sloan. He suspects Ripple is a noncompliant security, and he told me in an interview for Decrypt that the SAFT construct—a once-popular idea for launching an initial coin offering—will not spare a token from securities laws. (He also thinks 99% of all ICOs are securities.)

Libra Shrugged author David Gerard said in a tweet that Gensler was excellent in the Libra hearing last July. Gensler also “helped clean up the 2008 financial crisis, he knows literally all the possible nonsense,” said Gerard.

Clearly, this is good news for bitcoin.

Nov. 15 — Before I said that OKEx offered the only fiat-to-crypto on/off ramp in China. That is inaccurate. P2P OTC exchanges *in general* are the only fiat on/off ramps for crypto traders in China and have been since Sept. 2017.

Nov. 16 — Previously, this story stated that Quadriga’s trustee has CA$30 million available to distribute to claimants. It’s been updated to correctly reflect that EY has CA$39 million (US$30 million) to distribute.

Posted on by Amy Castor 0

CLAM flash crash forces Poloniex to socialize $14M worth of BTC in losses — here’s what happened

Crypto markets are extremely volatile. You never know how wildly up or down the price may go or when. This turned out to be a disaster for US crypto exchange Poloniex when an obscure token that it offered peer-to-peer margin trading on suffered a flash crash.

On May 26, the price of  CLAM dropped so violently that margin borrowers blew their margins multiple times over. The loss was huge: 1,800 BTC, valued at around $14 million.

Now Poloniex has to figure out how to extract the losses from the borrowers. For now, lenders will have to suck up the loss. On 14:00 UTC on June 6 — a full 10 days after the incident — Poloniex applied a 16.202% haircut to the principal of all active BTC loans. Even lenders not active at the time of the crash were affected.

Prior to announcing the haircut, Poloniex suspended trading for several hours on Wednesday as part of a “planned” maintenance. It wasn’t until trading resumed that margin lenders realized a portion of their BTC was missing. 

In a Medium post, Poloniex revealed that a large part of the loans were collateralized in CLAM — so both the borrowers’ positions and their collateral lost most of their value. In other words, the funds simply evaporated, and there was nothing to repay loans with.  

The exchange says it has frozen all defaulted borrowers’ accounts until they repay their loans, as spelled out in the the company’s terms of service. 

“As we recover funds, we will return them to affected lenders. We’re also exploring other ways to help defray margin lender losses,” Poloniex wrote.  

Naturally, the margin lenders, which only account for 0.4% of Polo’s user base, are completely pissed off. Why did Polo not have better risk management in place? Why did it not have an insurance fund set up to absorb the loss? And why did  Polo allow margin trades — and collateral loans — on an extremely illiquid coin in the first place?

What is margin trading?

Margin trading is risky business, even more so when you are trading crypto assets, due to their high volatility. When you trade on margin, you put down a collateral and borrow against that, doubling, tripling, quadrupling — or whatever — your trade.

Trading on margin magnifies your profits, but also your losses. If the trade goes in your favor, you can repay the loan and tuck in a nice profit. But if the price of the asset slips enough so it looks like your trade won’t pay off, the exchange can call in your margin, and you lose all of the collateral you put down for the loan.  

Bitcoin derivatives exchange BitMEX loans you the funds for margin trades. Poloniex does something different. It uses peer-to-peer margin trades, where a common pool of lenders puts up BTC, CLAM, and other coins. They get paid in interest. According to Poloniex’s website (archive), only customers who are outside of the US are allowed to loan their funds on the exchange.

As a lender, you set your own daily interest rate, and Poloniex takes a fee of 15% from the interest earned. Margin traders consume lending offers starting with the lowest rate. If your rates are too high, your funds sit in the pool, and you don’t earn any interest. 

CLAM, the casino coin

Screen Shot 2019-06-06 at 10.36.34 PMIf you were paying close attention a year ago, you may have heard John Oliver mention CLAM on “Last Week Tonight,” along with Titcoin, Jesuscoin, Trumpcoin and a bunch of other coins with hilarious names.  

CLAM stands for “Caritas Libertas Aequitas Monetas,” which roughly translates to freedom, fairness, equality coins — whatever that means. The coin launched in May 2014, as a fork of Blackcoin (BLK), which launched in February 2014 as a fork of Peercoin, an early proof-of-stake coin.  

On May 12, 2014, CLAM was sent to all active users of bitcoin, litecoin and dogecoin —three popular coins at the time. Every unique wallet address pulled from those blockchains that had a balance above zero got about 4.6 CLAM. The total amount of CLAM distributed to those addresses was 14,897,662.

CLAM was mainly intended for use on Just-Dice, a gambling site created by a Canadian known only as “dooglus.” Originally Just-Dice relied on bitcoin. But due to new bitcoin regulation in Canada, dooglus decided to switch to CLAM in late 2014. 

The circulating supply of CLAM is only 3,624,208. Nearly all of that—99.81%—is traded on Poloniex. At one point, CLAM was listed on Bittrex and Cryptopia, but Bittrex delisted the coin in October 2018 and Cryptopia went belly up in May 2019.   

According to CoinMarketCap, CLAM has a daily trading volume of less than $100,000, meaning the coin barely has a pulse. Three months ago, two traders complained on Reddit of long delays withdrawing CLAM as they waited for the lifeless network to pick up their transactions.

“I withdrew CLAM 11 days ago. Poloniex Support said ‘as soon as a miner picks up the transaction’ How f@%#$%g long is that?,” wrote Reddit user interop5. (Technically, CLAM is a proof of stake coin, so it relies on stakers, not miners.)

CLAM’s lack of liquidity makes it extremely easy to manipulate. All you need is one person to put up a large sell order to crash the price. Poloniex has yet to release details on what happened, but we can guess it was something along those lines. 

History repeats 

As a result of the flash crash debacle, Poloniex has removed CLAM from margin trading, along with three other coins: bitshares (BTS), factom (FCT), and maidsafecoin (MAID). The exchange outright admits these coins lacked sufficient liquidity:

“In order for margin liquidations to process in an orderly manner, the market must have sufficient liquidity, and these tokens currently lack that liquidity. We will continue to monitor them and may reinstate margin trading for them in the future”

This is not the first time Poloniex removed CLAM as a margin market and collateral coin. It was removed in early November 2017 due to low liquidity, after an earlier flash crash, despite CLAM’s liquidity never recovering, at some point, Poloniex decided to add CLAM back as a margin market and collateral coin—though I’m not sure exactly when.   

Screen Shot 2019-06-08 at 7.20.19 AMAnd then, of course, the exact same thing happened. In February 2019, the price of CLAM started to climb rapidly on Poloniex. In a matter of six weeks, it went from around $1.50 to a high of nearly $20 on May 26. At that point, the bottom fell out with CLAM losing three-quarters of its value in the blink of an eye. It sunk down to around $5.

According to Andrew Hires, a neurobiology professor at the University of Southern California, who has been watching the exchange, Poloniex had been struggling with its CLAM wallet for months. He tweeted:

“All deposits had to be manually credited via ticket. This screwed up the sell-side liquidity. Huge bids (>500BTC), presumably margin longs, crept up over months, pushing $ price up 17x. Just after it hit $20, everything imploded.” 

Spreading the loss

Socializing losses is unique to crypto exchanges. Like Poloniex, OKEx also socializes extreme margin losses, but literally requires customers to pass a test on their terms of service before they can trade futures, so they are absolutely clear on how it works.

According to crypto lawyer David Silver, socializing losses could open Poloniex to a lawsuit. Another lawyer, Stephen Palley, disagrees. Palley told The Block, he doesn’t think Poloniex breached its terms of service.

On the other hand, Emilien Dutang, who was pinged by the haircut and says he offered margin lending on the exchange after the flash crash, is threatening legal action.

None of this bodes well for Poloniex. Circle acquired the exchange in early 2018 with the intention of cleaning it up and dealing with a humongous backlog of support tickets. But at this level, Poloniex appears only slightly more competent than QuadrigaCX.

# # #

 

Posted on by Amy Castor 0