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Korean Police Allege Coinone's Crypto Margin Trading Is Illegal Gambling

A South Korean police department has said it will bring charges against cryptocurrency exchange Coinone over its provision of margin trading, a report says.

According to a Yonhap report Wednesday, the cybercrime investigation unit of the country’s southern provincial police department alleged that Coinone’s crypto margin trading is, in effect, offering illegal gambling that could be used to launder criminal proceeds.

The police department further referred to results from its 10-month investigation, which found about 19,000 users had participated in margin trading on the platform, among which some 20 traders had become primary targets due to their high volume of trading.

The high-volume traders, as alleged by the police, in total handled over 3 billion won ($2.8 million) in 3,000 to 13,000 instances of margin trading using Coinone’s service, which is deemed illegal gambling by the police after reviewing existing law.

The police department indicated it plans to send three executives from Coinone, including its CEO Myunghun Cha, for prosecution, as well as the 20 high-volume traders, the report said.

Coinone offered its margin trading service from November 2016 to December of last year and according to the report, the police started the investigation in August 2017, marking one of its earliest efforts to more deeply scrutinize the business operations of domestic cryptocurrency exchanges.

In an email response to a CoinDesk enquiry for comment, a representative from Coinone stated:

“At this time we are focused on cooperating with the ongoing investigation, and will continue to do so as the case is in the process of moving over to the Prosecution Service from the Police Agency.”

Editor’s Note: Some of the statements in this report have been translated from Korean.

Korean police image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Buyer Beware? Credit Creeps Into Crypto

Marc Hochstein is the managing editor of CoinDesk and a former editor-in-chief of American Banker. 

The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.


Neither a lender nor a borrower be.”

Polonius’ advice to Laertes in “Hamlet” might well have been a rallying cry for the early bitcoin adopters who sought an alternative to fractional reserve banking.

On a blockchain, an asset can be in your wallet, or it can be in my wallet. It cannot be in both at the same time. You can still lend it to me, but if you do, it’s like letting me borrow your lawnmower – you can’t mow your own lawn until I return it. Unlike banks as we know them, lenders of bitcoin cannot create money out of thin air, Jamie Dimon’s comments notwithstanding.

Quite apart from providing an alternative to central bank money creation, however, cryptocurrencies and blockchains imply liberation from more prosaic forms of credit.

For example, the peer-to-peer architecture of cryptocurrency means transactions are continuously settled on a gross, or one-to-one, basis, rather than waiting to net out a batch of debits and credits across the books of a central intermediary.

Meanwhile, blockchain securities platforms such as tZERO seek to collapse Wall Street’s Rube Goldberg assembly line of trade, clearing and settlement into something closer to “one and done.”

And in an emerging type of crypto transaction called atomic cross-chain swaps, it is impossible for only one side of a trade to go through. It gets done, or it doesn’t.

All of these innovations should, in theory, reduce the need for credit to bridge the gap between trade and settlement, and lead us to a world without baffling distinctions on our bank statements like “current balance” versus “available balance.”

And yet, credit, in various forms, is creeping into the blockchain economy.

Leveraged bets

Consider the following:

  • With bitcoin’s price hitting new all-time highs and garnering mainstream media coverage, there are secondhand reports of U.S. consumers going into debt to buy cryptocurrency. “We’ve seen mortgages being taken out to buy bitcoin,” Joseph Borg, president of the North American Securities Administrators Association, said on CNBC. “People do credit cards, equity lines,” said Borg, who is also director of the Alabama Securities Commission.
  • Most or all of the major crypto exchanges offer margin trading (including, ironically, Poloniex, which apparently did not heed its Shakespearian namesake’s advice). BitFlyer, based in Japan, for example, allows traders to leverage up to 15 times their cash deposit. To be fair, the lending on these platforms is often peer-to-peer, between exchange customers. “We don’t take any risk. The trading is between our customers,” bitFlyer’s CEO Yuzo Kano told the Financial Times recently.
  • At CoinDesk’s Consensus: Invest conference last month, there was much talk of bringing other forms of leverage, such as prime brokerage and securities lending-type services, into the crypto market to accommodate demand from newly-arrived institutional investors.
  • There is some speculation that Tether, the issuer of a dollar-pegged cryptocurrency, has been printing tokens to drive up the price of bitcoin on Bitfinex, an affiliated crypto exchange. For the record, Tether has said its tokens are fully backed and that a forthcoming audit should put the doubts to rest.

Some out there will say: Told you so.

According to one school of thought, credit, be it net settlement or fractional reserve banking, is necessary for a functioning financial system, and to think otherwise is naive utopianism.

Expressing this view, Perry Mehrling, an economics professor at Columbia University’s Barnard College, exhorted techies to wake up and smell the interdependency in a September blog post:

“…[M]arkets are being made to convert one cryptocurrency into another, and … markets are being made to convert cryptocurrency into so-called fiat. Someone or something is making those markets, and in so doing expanding and contracting a balance sheet, in search of expected profit. … Cryptos fear credit, but I suspect they will soon discover that credit is a feature not a bug, and that will require them to re-examine the implicit monetary theory that underlies their coding.”

But there’s another way to look at the situation, which might be summed up as: there goes the neighborhood.

The phantom menace

In other words, an influx of get-rich-quick types, whether they’re individuals taking out loans to buy crypto or institutional investors seeking to juice returns with leverage, could encourage the sort of behavior that bitcoin was designed to escape.

Like, say, a hosted wallet provider lending out customers’ bitcoin without telling them.

“I fear the financialization of bitcoin, in the sense that it may create phantom bitcoin that may not actually exist,” said Caitlin Long, the president and chairman of Symbiont, an enterprise blockchain startup.

As a Wall Street veteran, Long doesn’t fit the typical bitcoiner profile, but she’s been personally investing in the cryptocurrency since as far back as 2013, when her day job was running the pension business at Morgan Stanley.

“As more of the non-philosophical owners of bitcoin come in to bitcoin, where you’re seeing more and more of a push toward the financialization of it, I think that would be a shame,” she said. “Even though it would boost the price in the short term, it would remove bitcoin from being a true store of value.”

Switching back to the securities markets, Long said she doesn’t buy the argument that net settlement is necessary for a system to function. For one thing, the practice creates little-appreciated risks.

“As long as you’re allowing net settlement, you’re not forcing a true-up on every trade that there is one buyer and one seller,” she said. “If you’re allowing net settlement, what you’re really doing is allowing multiple buyers for only one asset.”

Hence situations like the court case this year in which brokerage firms had sold more shares in Dole Food than the company had actually issued.

Further, Long said, the global financial markets have dragged their feet in speeding up settlement times not because the status quo is efficient but because it’s profitable for incumbents.

“The whole reason we have T+3, T+2 settlement is for securities lending,” she said. “It’s all about brokerage firms who want to be able to lend their clients’ securities to other clients and take a spread.”

Reality check

In this light, blockchains are not the mere fantasy of a coterie of anarcho-capitalists and Silicon Valley propellerheads, as a number of skeptical academics, journalists and bloggers make the technology out to be.

Rather, if put into wider practice, blockchains might dispel many current, widely held fantasies.

To be sure, there may be times where credit (ultimately another word for “trust”) is truly unavoidable. By trusting me not to run out the door without paying, the grocer is in a sense extending me credit for the minute or so between when I pick up a jar of pickles from the shelf and when I pay at the counter.

And when you order a pickle slicer from Amazon, you are in a way extending credit to the retailer by paying and waiting a few days for the delivery.

But these are transactions involving physical objects, and the “loan” terms are only as long as they need to be. When the items being exchanged are purely electronic abstractions (as money and securities increasingly are), what purpose does credit (waiting to be renumerated) serve?

It’s a question that we should at least ask, and demand better answers than “this is the way it’s always been done.”

This above all: To thine own trades be true.

Shadow image via Shutterstock

The leader in blockchain news, CoinDesk strives to offer an open platform for dialogue and discussion on all things blockchain by encouraging contributed articles. As such, the opinions expressed in this article are the author’s own and do not necessarily reflect the view of CoinDesk.

For more details on how you can submit an opinion or analysis article, view our Editorial Collaboration Guide or email news@coindesk.com.

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Bitcoin Is an Emerging Systemic Risk

Preston Byrne is an independent consultant and founder of Tomram LLC and the former chief operating officer of Monax Industries, an enterprise blockchain software vendor.


Recent news stories make it pretty clear that the new people in bitcoin clearly have no idea what they’ve gotten themselves into.

Bitcoin is the Gom Jabbar of high finance. Cypherpunks who have populated the space to date hold the line because they do not care about money, and therefore do not fear.

These new people are different. The only reason they are here is the money.

They reek of fear.

When we consider that money from fresh, naive amateurs is flowing into the sector at a rate of millions of people per month, we should also understand that these amateurs are more susceptible to the animal spirits than their stoic, abrasive, less-socially-adept, battle-hardened forebears.

They will be prone to cut and run.

As such, a shock to the system, such as an exchange being taken down in a necessary and overdue enforcement action, could lead to a loss in confidence in the entire cryptocurrency ecosystem as a whole and a stampede for the exits the likes of which bitcoin has not seen to date.

In a recent post on my own blog, I pointed out that bitcoin, by setting itself up as a sort of decentralized bank, was also creating an unreasonable expectation to its new “depositors” that they will always be able to redeem their assets at par, given a wild mismatch between its $200 billion “market cap” and new investor money – which is clearly well shy of that number.

This expectation is dangerous as it means, in the event of a liquidity crunch, people will behave not as people necessarily behave when there’s a sharp sell-off in a stock, but more along the lines of when their bank’s solvency is being called into question. Remember bank runs?

As bitcoin qua decentralized bank is running a fractional reserve with a chronic shortage of dollars, a shock therefore has the potential to not just drive the price of bitcoin down a little bit, but also lead to a major liquidity crunch and abject panic.

Credit comes to crypto

In my post, I wrote:

“In the current environment, there are a number of ways such a shock could arise. To begin with, I seriously question the intermediaries’ and traders’ ability to top up their USD holdings quickly enough to catch up with their depositors’ and counterparties’ paper gains in bitcoin. There is also the possibility that, in the event of a correction or an enforcement action, a risk-averse bank to a major service provider withdraws either credit or banking services to that provider, compromising that service provider’s ability to convert BTC into dollars, provide margin lending, or even to hold fiat deposits at all.”

I had a hunch people were lending into the sector. I just didn’t know the degree of alacrity with which this lending was taking place.

Fortunately, I was reading CoinDesk this afternoon and the reporting from the Consensus:Invest conference delivered:

“Dan Matuszewski, the head of trading at Circle Internet Financial, said during a morning panel that there is a ‘real strong need’ for the ability to borrow in this market.

It would not only facilitate short positions but also provide working capital for trading desks to make markets, he said.

During his talk, [Max] Boonen of B2C2 acknowledged the irony of the situation given that bitcoin was born as a reaction to the 2008 credit crisis.

‘Bitcoin enthusiasts really, really do not like credit,’ he said. But, he added, ‘for better or for worse, credit is an important part of a functioning and liquid financial market…’

…Even before the institutional money started flowing in, he noted, ‘by necessity, credit did creep back into bitcoin and crypto markets in general,’ with the major exchanges offering leverage to the early retail investors.”

So someone’s lending directly into the market, we just don’t know who, nor how much, nor where the liquidity for these lines of credit is ultimately coming from.

Leverage sneaks into the ecosystem in other ways, too; for example, Coinbase accepts credit cards, which is basically margin trading for grandmas, without collateral and with 20%+ rates of annual interest.

Given that rather a lot of people seem to be interested in buying bitcoin in this way, and that platform is racking up a few hundred thousand new users a week, there’s undoubtedly systemic risk building up there. 

Then there’s Bitfinex and Tether, which I do not intend to discuss save to share this passage from The New York Times:

“One persistent online critic, going by the screen name Bitfinex’ed, has written several very detailed essays on Medium arguing that Bitfinex appears to be creating Tether coins out of thin air and then using them to buy Bitcoin and push the price up.”

Long story short, these neophyte masters of the universe, too young (or too busy working as a dev in California) to know what a financial crisis feels like, and too dilettantish to find out, are successfully (a) getting buyers to leverage to buy coins, in some cases probably up to the hilt, or (b) convincing institutions to lend into this titanic, one-way, unhedged, $300 billion insanity trade, and trying to convince more of them to do so in greater amounts.

This could become serious

There are two not necessarily mutually exclusive ways people are responding to the Great Bubble of 2017: anticipatory schadenfreude on the one hand, abject horror on the other.

So far the response from mainstream finance has been the former, with The Wall Street Journal’s treatment of the subject being more or less a long-form joke.

But while there is something ineffably twee about a retiree trying to show how they’re hip and “down with the kids” thanks to their position in “big coin,” the fact that they are doing so raises very serious questions about bubble-driven risk (and attendant negative externalities to society) which merits closer attention. As of right now, the notional value of the cryptocurrency sector is roughly a third the size of Long-Term Capital Management at its peak.

Cryptocurrency is, admittedly, much smaller than the subprime bubble that popped a decade ago, which was roughly two orders of magnitude larger than bitcoin today. But bitcoin has shown, on several occasions, a persistent ability to defy detractors like me to grow an order of magnitude in less than 12 months; if it does so again, it will be three times larger than LTCM. LTCM on its own very nearly ruined the world in 1998.

If we aren’t careful, this is the kind of market where a financial institution can get in serious trouble extremely quickly (imagine the damage a character like Nick Leeson or Kweku Adoboli could have done trading Bitcoin contracts – which are coming soon to both the CME and, reportedly, Nasdaq).

We know that cryptocurrency marketing is writing checks the technology can’t cash; most of these systems are unusable as backbones for global finance. It is a matter of time before the punter on the street becomes as disillusioned as I, an irascible blockchain software entrepreneur, have become. It’s just that none of the newcomers know what they’re doing, and most of the old-timers who have figured this out are keeping their mouths shut out of self-interest.

Put another way, this is a disaster waiting to happen. Fortunately for us, 2008 is not ancient history, and the fact that Bitcoin is a classic, manic bubble is so transparently obvious that it should be impossible for thinking people to deal with it otherwise. There are no excuses for not doing right by the societies and taxpayers who had to bail out the financial services industry last time around.

Just say no

So, banks, shadow banks, and anyone else of systemic importance, I implore you: for the good of everyone, by which I mean for the good of the human species, keep this garbage, and anything connected to it, the hell off of your balance sheets.

For once, please have the good sense to not load up on frothy bubble-driven financial assets, which you have done hitherto with such predictable regularity that the European Central Bank can model it and write a 52-page paper on the subject which is actually fun to read.

That way, when regulators finally bring this party to the bitter end it so richly deserves, the rest of the ship won’t go down with it.

Bank run image via Wikimedia Commons.

The leader in blockchain news, CoinDesk strives to offer an open platform for dialogue and discussion on all things blockchain by encouraging contributed articles. As such, the opinions expressed in this article are the author’s own and do not necessarily reflect the view of CoinDesk.

For more details on how you can submit an opinion or analysis article, view our Editorial Collaboration Guide or email news@coindesk.com.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.

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Credit for Cryptos: For Better (or Worse) Leverage Trading Is Arriving

“Leverage is the touchstone of most of the bubbles in the world.”

A few years ago, that comment by Murray Stahl, chairman and CEO of asset manager Horizon Kinetics, would have been so typical for a cryptocurrency conference as to escape notice. But at CoinDesk’s Consensus: Invest event on Tuesday in New York, Stahl’s credit-wary sentiment stood out as an outlier.

Instead, “leverage,” “lending,” “margin trading” and “credit” were painted as elements of the market that need to be further developed (along with better custody services) in order for the nascent crypto asset industry to flourish – not sins of the legacy financial system to avoid repeating.

Call it a sign of selling out, an early warning of systemic risk or simply an indicator that the cryptocurrency world is maturing. Either way, the arrival of institutional and high-net-worth investors in the space has created openings for services similar to the prime brokerage that financial institutions have long provided to hedge funds, several speakers said.

“There is a strong demand for leverage in the space,” said Adam White, a vice president at Coinbase and general manager of GDAX, its digital asset trading platform.

To meet that demand, GDAX hopes to reintroduce a margin service that it put on “pause” earlier this year, White said during a morning panel discussion. (He didn’t say why the service was suspended, but it apparently happened sometime after the ether “flash crash this summer.)

Trade-offs

But the desire of traders to amplify returns with leverage is not the only reason some see a need for more lending in this market.

Rather, some provision of credit on an intraday basis and post-trade settlement is inescapable even when assets are settled on a blockchain, said Max Boonen, CEO of B2C2, an electronic market making firm based in London.

During his morning presentation, Boone challenged one of the long-touted selling points of blockchains: the instant settlement of trades.

He told the 1,300-strong crowd: 

“Could settlement become faster? Yes. Could settlement become instant? Absolutely not, and nor should it be.”

For one thing, the block size debate in bitcoin has underscored that there is a “trade-off between the speed of settlement and the resilience of the payments infrastructure,” he said. “The more transactions you push through the network, the more brittle it can become.”

Moreover, gross settlement – a pre-blockchain term for trades that are settled as soon as they are processed – “imposes a lot of pressure on the balance sheets of market participants,” said Boonen.

For example, he told the audience, “if I buy $1 million of Treasuries in the morning, and I sell my Treasuries in the afternoon, I need to maintain at all times that $1 million on my balance sheet.”

On the other hand, net settlement (the type of system that real-time gross settlement and later blockchains were supposed to replace) allows for a more efficient use of balance sheets – but requires intraday credit, he said.

Credit creeps in

Echoing these speakers, Dan Matuszewski, the head of trading at Circle Internet Financial, said during a morning panel that there is a “real strong need” for the ability to borrow in this market.

It would not only facilitate short positions but also provide working capital for trading desks to make markets, he said.

During his talk, Boonen of B2C2 acknowledged the irony of the situation given that bitcoin was born as a reaction to the 2008 credit crisis.

“Bitcoin enthusiasts really, really do not like credit,” he said. But, he added, “for better or for worse, credit is an important part of a functioning and liquid financial market.”

Even before the institutional money started flowing in, he noted, “by necessity, credit did creep back into bitcoin and crypto markets in general,” with the major exchanges offering leverage to the early retail investors.

The “beauty” of cryptocurrency is that trusted third parties are not required to simply transfer funds between wallets, Boonen said. But for now, he added, they are needed for the more complex business of trading crypto assets, “to a much greater extent than in the mainstream financial markets.”

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Coinbase

Photo via Michael del Castillo.

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at news@coindesk.com.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.