The Commodity Futures Trading Commission is investigating Coinbase for an Ethereum “flash crash” that occurred in June. During the crash, the ETH exchange rate plummeted down in an instant, but quickly regained its price. According to Bloomberg, Ethereum dropped from trading at $317.81, down to 10 cents in a split second. However, its recovery was also swift. It regained a $300 price point in mere seconds.
The Bloomberg article said, “The Commodity Futures Trading Commission has requested information from Coinbase Inc. about a June 21 incident on its GDAX platform in which the Ether digital token suffered a precipitous drop, falling to 10 cents from $317.81 in milliseconds before quickly recovering, said two people familiar with the matter.”
Could Margin Trading have caused the Plunge?
The CFTC is concerned that leveraged or margin trading may have precipitated the flash crash. Margin trading allows users to borrow money to trade. This is called trading “on margin” or “leveraged” trading.
"Among the issues the agency is focused on is what role leverage might have played in the plunge, as Coinbase allowed traders to use borrowed money to make bigger wagers than would have otherwise been possible, said the people, who asked not to be named because the review isn’t public"
After the flash crash, Coinbase discontinued their margin trading service. Their actions quickly piqued regulatory interest and scrutiny.
The Cryptocurrency Wild West and Coinbase Cooperation
Regulators are now scrutinizing cryptocurrency exchanges even more. It comes as no surprise that the CFTC is thoroughly investigating Coinbase because the CFTC wants to control the “wild west” nature of the digital currency ecosystem. The Bloomberg article also pointed out that Coinbase had conducted $20 billion in cryptocurrency transactions.
Even though officials and regulators are putting pressure on Coinbase, Coinbase doesn’t seem to be sweating it. They are fully cooperating with the CFTC’s investigation and even emailed this statement in response to the investigation:
“As a regulated financial institution, Coinbase complies with regulations and fully cooperates with regulators. After the GDAX market event in June 2017, we proactively reached out to a number of regulators, including the CFTC. We also decided to credit all customers who were impacted by this event. We are unaware of a formal investigation.”
Even though Coinbase is cooperating, some people are still curious about the cause of the crash.
What Initiated the Flash Crash?
According to sources, the Ethereum flash crash was caused by one monstrous trade. A single $12.5 million dollar sell order triggered auto-trades preset by other traders. This resulted in the immediate crash down to 10 cents. Luckily, as soon as Ethereum hit the 10 cent mark, a multitude of traders immediately placed new orders for the digital currency. This caused a jump back to around $300.
It is currently unclear if margin trading was the culprit, or if Coinbase was culpable for the incident. Regardless, the cryptocurrency and bitcoin markets will continue to generate mainstream regulatory scrutiny, as well as mainstream adoption.
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