Bitcoin Investment OKEx Clawback Debacle Helps Case for a Regulated Bitcoin ETF
Ian Tozer | Aug 07, 2018 | 20:00
The OKEx debacle shows us that exchanges are dropping the ball when it comes to preventative risk management, helping the case for regulated Bitcoin futures and exchange-traded funds (ETF).
Ask for forgiveness later, not permission now. This seems the defining mantra for most cryptocurrency exchanges. Hong Kong-based Bitcoin exchange, OKEx, is no exception to the rule.
On August 3rd, the company’s failure to manage a $416 million trade, led to a $9 million clawback. They activated their ‘societal loss risk management mechanism.’ Which means they used users’ trading profits to mitigate the loss.
The problem with OKEx stems from their laissez-faire risk management. According to the OKEx statement, the risk management team contacted the client “immediately.” Yet, exchange risk management needs to be preventative, not reactive. Whilst the trade should be easy to fix, it highlights an issue with the crypto community. Overlooking risk management in the rush to make money.
BRIGHT FUTURE FOR FUTURES
This could play well into the hands of CME and CBOE who launched Bitcoin future contracts markets in late 2017. Futures trading has continued to grow since.
Both of these Chicago based Futures Exchanges are diligent and experienced. Past CME product development staff, are already singing praises. Though Bitcoin futures are still in the early stages, CME or CBOE will likely not make such basic errors.
“From my experience, they would not have missed anything this simple,” columnist Peter Tchir wrote in Forbes.
CBOE’s VanEck/SolidX proposal has already generated serious buzz among investors. In particular, because it’s settled in actual bitcoin. But, now given OKEx’s flop, the spotlight is on CME/CBOE to show their strengths.
THE SEC IS WARMING
The timing of the OKEx clawback is particularly beneficial to CME and CBOE as the SEC is warming to cryptocurrency. In particular, SEC Commissioner, Hester Peirce is pro-Bitcoin ETF and is one of four commissions responsible for the fate of the Bitcoin ETF.
By [looking at the underlying asset Bitcoin], they went beyond what the statute allows us to do. We should have focused on the market where the exchange-traded product would trade as opposed to focusing on the underlying Bitcoin markets.
OPPORTUNITY FOR U.S. FUTURES
News that at least one SEC commissioner is on board with Crypto is encouraging. It means things could be shaping up for CME and CBOE if they live up to their reputation.
On regulation, a former CME employee commented:
I am sure that regulators will be questioning them on the back of the OKEX, as they should, and I am also quite positive the exchanges here will pass with flying colors.
And in a note of optimism, he said:
If anything, this should drive business to the best regulated and largest exchanges.
Clearer regulations and reduced volatility are good. It increases the likelihood of mainstream investment. If there is one thing we can learn from the OKeX debacle, is that it market manipulation is the problem.
Cryptocurrency fundamentals are fine, and it’s not the responsibility of the SEC to scrutinize. The SEC needs to look at the ETF product itself and the market where it will trade, rather analyzing Bitcoin and its markets.
The decision for CBOE’s VanEck/SolidX proposal is scheduled for August 10th, though an extension into 2019 is likely.
Do CME and CBOE stand to gain from increased regulatory scrutiny?
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