OKEx Bitcoin Cash Futures Debacle Shows Danger of Unregulated Exchanges
The latest Bitcoin Cash hard fork had ramifications on the entire crypto community. Independent of whether you trade BCH, its recent split had disastrous financial consequences for many… and inspired some unorthodox moves from others.
Malta-based exchange OKEx left traders furious last week after taking the decision to change the terms on $135 million Bitcoin Cash derivatives contracts.
As one of the world’s largest crypto exchanges (and part of a handful to offer derivatives trading as well as spot) OKEx has gained in popularity. It’s also ramped up the trading volume, handling some $1 billion or more of crypto trades daily. That’s a lot of transactions.
OKEx Changing the Contract Terms
The OKEx decision to change contract terms involved futures in Bitcoin Cash. The fork was causing headaches and hash wars all round and splitting the crypto community down the middle. So, the exchange took matters into its own hands. It forced the early settlement of all Bitcoin Cash contracts without warning on November 14–right before the fork took place and just as prices were beginning to freefall.
SPECIAL ANNOUNCEMENT: All Bitcoin Cash (BCH) futures contracts will stop trading at 9:05am and be delivered at 10:00am Nov 14, 2018 CET (UTC +1) due to the upcoming hard fork. We will provide a detailed explanation shortly.#OKExAnnouncementhttps://t.co/yh3p46tirc pic.twitter.com/oqioSUOUsf
— OKEx (@OKEx) November 14, 2018
This decision went against the stance that the exchange had previously announced on November 9, that it would list Bitcoin ABC after the fork. This decision was in line with most other exchanges. In the event that two chains could not co-exist after the fork and BSV emerged victoriously, futures contracts in ABC would likely settle worthless. Traders began to make adequate adjustments, selling contracts, and pricing for this risk.
So, upon the news of early settlements, derivatives traders on OKEx were left hit by an ice-cold shower in the middle of winter. One trader quoted in Bloomberg Qiao Changhe said that his fund lost $700,000. The hedging position it was forced to take by OKEx was not reflective of prevailing market prices at the level it closed. Qiao will now be reducing his $5-million fund’s usage of the exchange.
Traders Calling Contract Changes “Fiddling”
Qiao isn’t alone in fleeing from the exchange. Plenty of other traders will also be scaling back or cutting ties completely. Qiao said:
“OKEx is losing its credibility… The futures contract became something nonsense, not something we could use to hedge.”
In a statement, OKEx pointed to the extreme volatility behind their decision, saying:
“Due to the upcoming hard fork, strong volatility is observed in the BCH spot and futures markets. We expect an even greater volatility during the hard fork that may cause large-scale impacts, such as cascade liquidation.”
They went on to call the outcome “unpredictable” and say that the exchange:
“may lack time to respond to the market.”
They also explained why no prior notice was given as a bid to reduce the chances of market manipulation:
“It has come to our concern that an early announcement may make room for market manipulation and cause loss to our users. Therefore, we decided to give a short notice in order to maintain the fairness and stability of the market.”
While this may sound plausible, OKEx is the only exchange who made the decision to force an early settlement of Bitcoin Cash contracts. This is something that may not be illegal but is certainly unorthodox–and highly unpopular with traders, leaving many reeling from losses.
OKEx Accused of Market Manipulation
Despite their statement to the contrary, the Malta-based exchange has also been openly accused of market manipulation. In an article on Medium by Amber AI, the author states:
“Over the past week we have seen behavior indicative of market manipulation by OKEx, and estimate $400mm+ of futures contracts have been forced into liquidation as a result.”
Today, OKEx released a statement in response to this article, discrediting the author’s claims of having a Hong-Kong based company and institutional account as fictitious. Moreover, the account Amber AI was an individual and not based in Hong Kong. They went on to reinforce the reason behind the early settlement as being:
“Based on the consideration of market integrity and customer interests. The early settlement was implemented in accordance with clause 2.5 of OKEx Futures Trading User Agreement, “If market anomalies occur before or after settlement and delivery, which results in wide fluctuation of futures index or abnormal clawback rate, we may postpone or early settlement and delivery as the case may be. We shall post an announcement regarding detailed rules.”
OKEx insists that upon seeing the large-scale impact that the BCH hard fork was going to have on the futures market, the exchange felt duty-bound to protect its customers as well as the markets, adding that:
“In the absence of evidence, Amber AI alleged us for trading against our own customers and manipulating the markets. These are completely false allegations and the defamatory statements have caused serious damages to OKEx’s reputation. We reserve all rights to take further legal actions against Amber AI for interfering OKEx’s business… We reaffirm that we will NEVER trade against our customers and manipulate the market.”
Not the First Time the Exchange Has Been Criticized
It’s not the first time that OKEx has been criticized. In August, it imposed losses on its clients after saying that it was unable to cover the shortfall of a major wrong-way bet by one of its users, throwing its risk management ability into question.
To add fuel to the fire, the day after the Bitcoin Cash futures contracts settled, on November 15, the exchange suffered a malfunction and traders were unable to execute orders for more than two hours during a time of extreme and heightened volatility.
When you consider that mainstream adoption of crypto is a long way from getting off the ground and that the community as a whole is dogged by reports of scams, hacks, and criminal activity; this latest move by OKEx does little to boost investor confidence. In fact, it serves to further highlight what can happen when trading on unregulated crypto exchanges.
Featured image from Shutterstock.