Despite their importance to the crypto industry, digital asset exchanges have always been painted in a bad light. Even Coinbase, arguably the most well-known cryptocurrency firm, has been subject to scrutiny, as have Binance and Bitfinex (especially Bitfinex).
Users’ fear and distaste towards exchanges may continue though, with news that Poloniex, a digital asset exchange owned by the Goldman Sachs-backed Circle, was mandated to give some of its clients a massive multimillion-dollar Bitcoin haircut. Ouch.
Crash in CLAM Causes $14M Bitcoin Loss
Announced on Thursday, Poloniex’s market for CLAM, a lesser-known but long-standing altcoin, suffered a massive collapse on May 26th. On this day, there was a “sudden, severe” crash in the value of the cryptocurrency, which widely went unnoticed by the public.
While such collapses are often seen, like the 99% flash crash seen on Kraken’s Bitcoin-to-Canadian Dollar pair last week, this one was notable in that it involved margin trading, also known as leverage.
CLAM’s sudden drop caused a “number of margin loans to default”, resulting in a “generalized” loss of 1,800 BTC, currently valued at just over $14 million, from Poloniex’s lending pool. This 1,800 BTC loss purportedly consists of 16% of all active Bitcoin loans. This means users of Poloniex’s Bitcoin loan pool, which purportedly make up 0.4% of the exchange’s entire user base, have lost 16% on their loan positions.
Per Poloniex, the reason why such drastic measures have taken place is due to the state of the CLAM market, which is widely illiquid and inefficient. With many borrowing collateralizing their loan in CLAM tokens, the collapse in the asset’s value made the “borrowers’ positions and their collateral” lose much of their value simultaneously, leading to a forceful default.
As a result of this announcement, the community has gone into a panic, reiterating the “not your keys, not your Bitcoin” argument and touting the issues with Poloniex. That’s the thing, unlike Binance, which reimbursed its users after a $40 million hack of Bitcoin, Poloniex has not announced intentions to offer affected users with any sort of compensation, citing the fact that haircuts abide by their terms of service. But who reads those anyway?
Circle Still In Pain
While margin trading is only available for Poloniex users outside of the United States, some are fearful that this could make the company more vulnerable than it already is.
As reported by Blockonomi on an earlier date, Circle is in between a rock and a hard place when it comes to its business. Over recent months, the firm hasn’t been doing all too hot. After reporting that it had cut 30 positions — 10% of its staffers — the firm was revealed to have been having trouble in venture capital land. More specifically, instead of seeking $250 million in external funding, Circle had cut its target to $150 million.
It is presumed that Circle’s core business, the over-the-counter (OTC) desk, has purportedly been subject to slimmer margins and more competitors.
More importantly, however, Circle has been under regulatory scrutiny. Last month, the firm delisted Ardor (ARDR), Bytecoin (BCN), Decred (DCR), Gamecredits (GAME), Neo’s GAS, Lisk (LSK), NXT, OMNI, and Augur’s REP for its clients in the United States, likely in a fear that financial regulators could deem those assets securities. This recent balance haircut, while not all too serious in the grand scheme of things, may put the company under further scrutiny from governmental entities.
Not The First Or Last Time
It is important to note that this isn’t the first time that a margin-supporting exchange has had to “socialize a loss” by giving users’ balances a nice ole’ haircut. Last year, when the cryptocurrency market was continuing to dump, OKEx liquidated a $416.9 million long position on their Bitcoin contract.
While the liquidation was triggered by an automated system of OKEx’s creation, the loss incurred was too much to handle, resulting in the firm independently paying $18.5 million and forcing its users to socialize a loss of $8.8 million.
Seeing the frequency of these debacles, which are a byproduct of the state of cryptocurrency margin, it is unlikely that such cases will disappear anytime soon.
If there’s a lesson here, it’s this: If the coins aren’t in your wallet, they aren’t exactly yours to keep.