Commodity Futures

Coinbase Unofficially Under CFTC Scrutiny for Ethereum Flash Crash

The U.S. Commodity Futures Trading Commission (CFTC), which earlier this year sued a trader for allegedly running a $600,000 bitcoin Ponzi scheme, is now investigating Coinbase for the Ethereum “flash crash” that occurred on its Global Digital Asset Exchange (GDAX) on June 21 this year.

According to a report from Bloomberg, Ethereum prices dropped from about $317.81 at the time, to only $0.10 in a split second, before quickly recovering to the $300 mark once again, in only a few seconds. Per Bloomberg, the CFTC is focusing on understanding what role margin trading might’ve played in the cryptocurrency’s crash, as at the time Coinbase’s GDAX allowed traders to use borrowed money to leverage their positions.

Coinbase, which notably claims to have over 10.6 million users, and to have facilitated $20 billion in digital currency transactions, is currently regulated in various states through a patchwork system but isn’t registered with the CFTC. Following June’s flash crash, it discontinued margin trading on GDAX.

The CFTC’s investigation should come as no surprise. As covered by Core Media, the agency is committed to FinTech innovation and is going to pay careful attention to scammers misusing the cryptocurrency, according to the agency’s Director of Enforcement, James McDonald.

Moreover, according to a report covered by Core Media, complaints against Coinbase surged by 4,700% this year. Last year, the U.S. Consumer Financial Protection Bureau (CFPB) only received six complaints regarding Coinbase, while this year the number was at 288, and could go as high as 442, according to LendEDU.

Coinbase, however, is seemingly not worried about the financial watchdog’s scrutiny, as in a statement the San Francisco-based cryptocurrency exchange made it clear it complies with regulations. It stated:

“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.”

What caused Ethereum’s flash crash?

According to GDAX vice president Adam White, Ethereum’s flash crash was caused by a monstrous $12.5 million sell order, which caused the initial price dip. The price them led to a domino effect, as it triggered 800 automatic sell orders placed by other traders, preset to trigger when Ethereum reached a certain price, and margin funding liquidations, which essentially helps investors trading with borrowed money from losing too much, by closing their positions.

Essentially, the $12.5 million sell order triggered various other sell orders that didn’t have enough buyers to mop up demand, leading to a flash crash as programs started to look for a price at which buyers stepped in to fill orders again.