Coinbase is being investigated by the Commodity Futures Trading Commission for an Ethereum “flash crash” that occurred in June. The ETH exchange rate plummeted in an instant during the crash, but quickly recovered. Ethereum dropped from $317.81 to 10 cents in a fraction of a second, according to Bloomberg. It did, however, recover quickly. In a matter of seconds, it regained its $300 price tag.
“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 fell to 10 cents from $317.81 in milliseconds before quickly recovering, said two people familiar with the matter,” according to the Bloomberg article.
Could Margin Trading be to Blame for the Drop?
The Commodity Futures Trading Commission (CFTC) is concerned that leveraged or margin trading may have triggered the flash crash. Users can borrow money to trade using margin trading. This is referred to as “leveraged” or “on margin” trading.
The agency is looking into what role leverage may have played in the crash, as Coinbase allowed traders to borrow money to make larger bets than would have been possible otherwise, according to the people, who asked not to be identified because the review isn’t public.
Coinbase stopped offering margin trading after the flash crash. Their actions drew regulatory attention and scrutiny almost immediately.
Cryptocurrency regulators, such as the Cryptocurrency Wild West and the Coinbase Cooperation, are now scrutinizing cryptocurrency exchanges even more closely. The CFTC’s investigation into Coinbase is unsurprising, given the agency’s desire to control the “wild west” nature of the digital currency ecosystem. Coinbase had also conducted $20 billion in cryptocurrency transactions, according to the Bloomberg article.
“Coinbase complies with regulations and fully cooperates with regulators as a regulated financial institution,” the company said in an emailed statement. “We proactively reached out to a number of regulators, including the CFTC, after the GDAX market event in June 2017.” We also decided to give all customers who were affected by the incident a credit. There hasn’t been any formal investigation as far as we know.”
Despite the fact that officials and regulators are putting pressure on Coinbase, the company does not appear to be concerned. They are fully cooperating with the CFTC’s investigation and have even responded to the investigation with the following statement:
“Coinbase complies with regulations and fully cooperates with regulators as a regulated financial institution.” We proactively reached out to a number of regulators, including the CFTC, following the GDAX market event in June 2017. We also decided to give all customers who were affected by the incident a credit. There hasn’t been any formal investigation as far as we know.”
Despite Coinbase’s cooperation, some people are still interested in learning what caused the crash.
What Was the Cause of the Flash Crash?
Coinbase is being investigated for the ‘Flash Crash’ of Ethereum.
One monstrous trade, according to sources, caused the Ethereum flash crash. Auto-trades set up by other traders were triggered by a single $12.5 million sell order. As a result, the price dropped to ten cents almost immediately. Fortunately, as soon as Ethereum hit the ten-cent mark, a flood of new orders for the digital currency flooded in. This resulted in a price drop to around $300.
It is currently unknown whether margin trading was to blame, or if Coinbase was to blame. Regardless, the cryptocurrency and bitcoin markets will continue to be scrutinized by regulators and adopted by the general public.
What are your thoughts on Coinbase’s Ethereum “flash crash”? Was it the result of margin trading? Is it up to regulators to control markets and market actors, even if Coinbase had a hand in it? Please let us know in the comments section below.