OKEx controversy grips the cryptocurrency world

On November 14th, one of the biggest cryptocurrency exchanges OKEx gave traders a big surprise when it changed its terms of the bitcoin cash contract and forced an early settlement on the same derivative, leaving traders with losses. This is not the first time that OKEx the Hong Kong-based exchange has faced controversies. This August, losses were transferred to traders after the exchange was unable to cover a big wrong way bet by one of its users.

Amidst all of this, the next day (November 15th), technical problems led to halting of trading for 2 hours during peak trading. Along with this, just before terminating contracts, OKEx replaced a price source, leading the underlying index to a composition change. This happened during live trading, thus changing the price of contracts. All of this adds to the lack of confidence in the crypto market which saw a drop in market cap of $650 billion recently. Considering the fact that OKEx is one of the largest crypto exchange which handles about 1 billion dollars in crypto trading daily, this is big news for many in the crypto world.

The underlying issue

The move, which is technically not illegal, has drawn flank from traders as well as those involved in the crypto world, prompting some to seek action from Hong Kong’s securities and futures commision with a complaint formally filed. The SFC is yet to act and has not commented. The formal explanation given by the exchange is that it was trying to protect customers from volatility. However, anyone involved with futures trading knows that it’s a high-risk gamble with the chance of high returns, and many traders have not bought into this explanation and are furious.

“OKEx is losing its credibility,” Qiao said. “The futures contract became something nonsense, not something we could use to hedge”. There is a serious lack of confidence which has been growing around OKEx and the way exchange handled this incident has added to the decrease in confidence. The exchange acted without notifying the traders, in order to mitigate market manipulation. Head of operations Andy Cheung was quoted, “After considering various scenarios, we decided that an early settlement was the fairest and rational decision to maintain an orderly market”. In a statement, OKEx apologized for any inconvenience and defended the move saying it was done for protecting customers from the volatility that is tied to the bitcoin cash split. Traders were not happy with this explanation as the move was not just a mere inconvenience but cost them real money.

The total value of the derivative in the discussion is $135 million, leading to some traders losing up to $700,000. Many are considering to scale down their business with OKEx, which will lead to an overall fall in the volume of trade in the exchange which is not good for OKEx. We will have to wait and watch how all of this unfolds in the coming days. What traders and regulators decide to do after the incident can greatly alter the course of the exchange, and the precedence it creates can also affect future cases involving crypto thus paving the way for greater regulation and regulatory oversight. Some parties like institutional investors welcome this while hardcore crypto enthusiasts do not support this.

Can it alter the world of cryptocurrencies?

The cryptocurrency market has also been a world of scams, controversies, and big shocks. There have been hacks, market manipulations, lack of regulations, ransom demands, and a lack of underlying assets or backing from a government to add to all of this volatility and possibly anything one can imagine. On top of this, events like the recent OKEx incident holds back the mainstream adoption of cryptocurrencies. Most banks, traders, merchants and other financial institutions are unwilling to adopt cryptocurrencies because of the high risks involved.

There has been a growing voice from within the crypto world calling for greater regulatory oversight so as to bring some confidence into the crypto world. This recent incident at OKEx is going to add steam to call for regulation which, according to some, goes against the core principles of cryptocurrencies whereby they are “decentralized and unregulated” ie, no one should be able to control it, not even the government. One thing is clear, with such incidents, the government will be forced to act and how the crypto world reacts will be interesting to watch in the near future.

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