An unorthodox move by one of the world's biggest cryptocurrency platforms to change the terms on US$135 million (NZ$197 million) of derivative contracts has infuriated some traders and saddled several with losses, underscoring the risks of using unregulated virtual currency exchanges.
The episode at Hong Kong-based OKEx, which claims to handle more than US$1 billion of crypto trades daily, involved futures on Bitcoin Cash, the virtual currency that split into two last week. In a decision that traders described as unusual if not unprecedented, OKEx forced the early settlement of its Bitcoin Cash contracts without warning on Nov. 14, just as prices were tumbling.
The move blindsided traders including Qiao Changhe, who said his fund lost US$700,000 because its hedging position on OKEx was abruptly closed at a level that didn't reflect prevailing market prices.
Qiao, a former energy futures trader who now runs Cayman Islands-registered Consensus Technologies, said he would reduce his US$5 million fund's use of OKEx because of the way it handled the Bitcoin Cash settlement. Four other traders who asked not to be named discussing private information also said they would scale back or end their relationships with the exchange. One of them filed a complaint with Hong Kong's Securities and Futures Commission. An SFC spokesman declined to comment.
"OKEx is losing its credibility," Qiao said. "The futures contract became something nonsense, not something we could use to hedge."
In a series of statements after the early settlement, OKEx apologised for "the inconvenience it may cause" but said the decision was taken to protect customers from the volatility associated with the Bitcoin Cash split.
The exchange said it acted without notifying clients to reduce the risk of market manipulation. "After considering various scenarios, we decided that an early settlement was the fairest and most rational decision to maintain an orderly market," Andy Cheung, head of operations at OKEx, said in a response to questions from Bloomberg.
Crypto traders who spoke with Bloomberg said OKEx was the only exchange they knew of that forced early settlement of Bitcoin Cash contracts.
"It may not be illegal, but it is very unusual," said Andrew Sullivan, a former managing director for sales trading at Haitong International Securities Group.
The controversy is just the latest to emerge from the nascent world of cryptocurrency exchanges, which proliferated over the past two years as wild swings in Bitcoin and its ilk vaulted digital assets into the public consciousness. The trading venues, most of which operate with little to no regulation, have been dogged by everything from market manipulation to trading outages and cyberthefts.
A lack of confidence in crypto exchanges is one reason many institutional investors are proceeding cautiously as they weigh whether to add exposure to digital assets. The slow pace of mainstream adoption has contributed to deep losses in virtual currencies this year, erasing about US$650 billion from the value of digital assets tracked by CoinMarketCap.com.
OKEx, which was founded by Star Xu, the entrepreneur behind Chinese crypto exchange OKCoin, has been criticised by traders before. In August, the exchange imposed losses on clients after it was unable to cover the shortfall from a massive wrong-way bet by one of its users. While the decision complied with OKEx's longstanding "socialised clawback" policy, the episode left many questioning the exchange's ability to manage risk.
In the latest incident, traders found several reasons to fault OKEx on top of the exchange's decision to force early settlement of its Bitcoin Cash futures.
Before the contracts were terminated, OKEx announced a change to the composition of the underlying index, replacing one of its price sources. The move occurred during live trading, and triggered a significant repricing of the contracts, according to Amber AI, a crypto market-making firm founded by former Morgan Stanley trader Tiantian Kullander.
On Nov. 15, a day after the Bitcoin Cash futures settled, a technical malfunction at OKEx left traders unable to execute orders for more than two hours, during a time of heightened market volatility, Amber AI said in a blog post on Monday titled "OKEX -- It's Time to Pay the Piper." The firm called for "regulation and transparency at OKEx in order to promote and maintain a healthy and fair trading environment."