Volatility in digital asset prices over the past week surprised few in the industry. However one incident stood out: a flash spike on Binance’s BTCUSD quarterly futures platform that saw BTC rise suddenly to around US$100,000, then fall back. The event may have been ho-hum to veteran blockchain watchers, but to outsiders and regulators it was another reason to see the digital asset industry as inherently untrustworthy, which will eventually result in further steps to rein it in.
Digital asset prices over the past ten years have been notoriously volatile. Large price movements often do not seem to correspond with any major news event or rise/fall in real-world blockchain utility. The market is often suspected to be controlled by a small number of “whale” traders who hold massive bags of these assets, with the ability to crank or tank their prices with a few trades. Digital asset exchanges attract more speculator business by throwing in even riskier elements like margin lending and derivatives into the mix.
Digital asset platforms often adopt the swagger that they’re outside the system and its regulations, and that they warn traders in advance of the risks. If their position is suddenly liquidated by a sudden movement, customers get little more than an unsympathetic email from the support desk or even mockery from other traders.
But these exchanges are very much inside the system and, like it or not, are covered by the same kind of regulations as any other stock exchange or forex platform. It’s just a matter of when and how the consequences reach the top.
What happened at Binance?
On August 2, 2020, according to Binance, one of its users’ trading algorithms “went ballistic,” placing a large number of orders over a very short period of time. The incident saw the BTC price shoot to US$99,964 at a time it was trading around the $12,000 mark everywhere else.
The spike occurred on Binance’s BTCUSD 0925 Quarterly Futures contract, where traders “bet” on what the BTC price will be at the end of each quarter. Binance CEO Changpeng Zhao (aka “CZ”) reassured users the platform’s price band protection prevented anyone’s positions being unfairly liquidated. The company also issued a statement promising to adjust its K-line so the price at the end of the futures contract wouldn’t be affected.
“Another day in crypto,” CZ said. And indeed it was.
Another day in crypto. We do have price band protection, but a user’s algo went ballistic and sent multiple orders to achieve this. We will likely have to adjust this chart a bit so that it’s readable in the future. pic.twitter.com/Tq4HjugXcw
— CZ Binance (@cz_binance) August 2, 2020
To be fair, events like flash crashes, out-of-control trading algorithms, and costly errors also occur on major “traditional” trading platforms in developed countries. These cause a lot more disruption to markets and account balances than digital asset exchanges. However, the jurisdictions in which these mainstream exchanges exist also have strict legal regulations in place to deal with them. They are able to impose heavy fines on institutions or individuals that cause trouble.
A Forbes article on the incident quoted its source as saying Binance’s sudden spike was a “wake-up call” to traders, who should be using “respected exchanges.” Since Binance’s price band protection prevented any other traders losing funds, he presumably includes Binance in that list of “respected exchanges.” But how respectable can an exchange be when its exact administrative location is unclear, when it attempts to dodge regulation by shifting jurisdictions, and manipulates markets by listing or delisting certain assets based on “listing fees,” or a cartel’s ideological whims?
Moreover, should a “respected exchange” suddenly suffer some catastrophic incident that erases all that respect, what recourse do its users have, and how long would it take to track down and unravel all its operations? Mt. Gox, which collapsed in 2014, had a relatively small customer base and minimal staff, yet even today few understand exactly what went on there.
Such behavior would not be tolerated by existing regulatory regimes. In cases like Mt. Gox and others that collapsed, they weren’t tolerated. BTC-e, a Wild West exchange if ever there was one, also had an opaque leadership and unknown location—U.S. authorities seized its domain and shut it down hard, taking most users’ funds with it, even though its operations weren’t in the United States.
Binance is one of the world’s most popular exchanges, so it’s very much on regulators’ radar. Can it avoid them forever? Even if the authorities can’t pinpoint the exact location of operations, they may decide to target the individuals in charge.
Regulation is catching up fast. Authorities in countries like the U.S. and Japan watch the digital asset industry like hawks, and China has banned exchanges altogether. The media may not pay attention to big losses, and enthusiasts often like to thumb their noses at the law. But governments notice all these actions, and have every intention to bring them under control.
Lawless casino image only hurts Bitcoin long-term
Speculators who earn riches at “crypto casinos,” and the people who run the platforms they use, seem to be content with digital assets’ primary use case as gambling tokens. The big “wins” are only made possible due to less-visible big losses by newcomers and unlucky traders.
In public they claim to be the “finance of the future,” or helping to “bank the unbanked,” but after 11 years of Bitcoin and blockchain there has been no great rush to use these digital assets in daily business, anywhere. BTC may be worth $12K but it’s in no position to replace anyone’s local currency, even if that currency should collapse tomorrow.
Bitcoin (now restored in its original form as BSV) aims to process and store the world’s data, and create an economy of microtransactions. It is, as its 2009 white paper describes, a digital cash system that is perfectly capable of handling daily transactions—and a lot more.
It can only do this if it gains the trust of ordinary and professional users, not speculators. Exchanges are playing to a crowd that suits them for now, but their existence only harms Bitcoin’s reputation and real value. The industry will need to reform and professionalize, and the “casino” image needs to disappear. If it doesn’t do that of its own volition, regulators will step in to do it for them.
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