- Second largest cryptocurrency exchange in the world, OKEx, causes losses to investors by delivering its Bitcoin Cash futures contracts early
- Spreading own losses between the users has become a common practice among cryptocurrency exchanges
A recent controversial situation with OKEx, the world’s second largest cryptocurrency exchange involved shows that those investing in cryptocurrency futures contract are putting their capital at great risk.
The Hong Kong-based firm delivered its Bitcoin Cash (BCH) futures contracts earlier than expected, which led to select traders losing money. This action made some of the affected traders approach Hong Kong’s Securities and Futures Commission, which has recently introduced a new conceptual framework, and file a case against OKEx.
Investors Playing with the Fire
The total value of the contracts influenced by the decision of the cryptocurrency exchange exceeds $400 million, as estimated by trading firm Amber AI based in Hong Kong. The company has stated in its Medium publication that this move of OKEx can be considered borderline fraudulent and clearly indicates the presence of market manipulation. These allegations have been denied by the exchange.
OKEx has already been in the news spotlight because of its controversial decisions that caused losses for investors. In July 2018, the exchange took an equal percentage of all the profits of each trader, later using it to plug a client’s margin call loss.
The Legal Complications
It is also important to point out that the risk of investing in cryptocurrency futures is unlikely to decrease for Hong Kong investors. Even though the SFC has introduced a regulatory sandbox for exchanges wanting to become licensed in Hong Kong, it does not grant licenses to those platform operators that trade virtual assets in form of futures contracts or derivatives. Because of this rule, such platform operators are unlikely to become regulated.
Such practices have become common among the cryptocurrency exchanges. Hoi Tak Leung, counsel at law firm Ashurst claims that cryptocurrency exchanges have a contractual right to spread losses among all the users, with consent to ‘loss-socialising’ mechanisms being one of the points in user agreements. As stated by Leung, this practice is applied to trading losses that occurred on the positions on the exchange’s order books and even the ones caused by other events, for example, hacking.
A number of market participants have found it confusing that SFC requires an exchange to be an operational trading platform in Hong Kong in order to become eligible for entry in this regulatory sandbox. Gaven Cheong, partner at law firm Simmons & Simmons, tried to clarify the situation:
“[One of the] core principles of the SFC Statement provides that it expects all services to be conducted under one single legal entity, but there is no specific requirement that this legal entity be a Hong Kong company or entity registered here.”
In the end, it is up to investors to deal with the possible consequences of exchanges’ policies and associated risks for as long as some exchanges remain unregulated.