OKEx blowout exposes soft underbelly of lightly regulated cryptocurrency transactions

In late July, an unidentified trader took up an unusually large position of 4.16 million bitcoin futures listed on Hong Kong-based OKEx, one of the world’s largest cryptocurrency venues.

The position, with a total notional value of US$416 million (HK$3.26 billion), triggered the risk management system at OKEx, setting off a chain of events that ultimately left futures traders with unrealised gains to give up about 18 per cent of their profits, according to calculations by Bloomberg.

The episode, which attracted attention in cryptocurrency circles, underscored the risk of trading in a lightly regulated market, where highly leveraged transactions thrive without the investor-protection buffers seen in conventional bourses for equities, currencies or fixed-income financial products.

In a conventional futures market, brokerages rather than the exchanges are required to ensure that their clients have sufficient margin deposits, and have the proper risk management and documentation in…