Financial watchdog probes major bitcoin exchange over ‘flash crash’

A federal financial watchdog is reportedly probing one of the most prominent cryptocurrency trading platforms over a “flash crash” in ether, which ranks among the popular cryptocurrencies.

The crash in question hinges on a $12.5 million sell order for 39,300 ether issued on June 21, which caused the price of ether on the Global Digital Asset Exchange (GDAX), to fall from $317.81 to just 10 cents in less than a second.

The Commodity Futures Trading Commission (CFTC) sent a letter to GDAX’s owner, Coinbase, the Financial Times reported.

{mosads}It is not uncommon for cryptocurrencies like ether and bitcoin to endure large fluctuations in price. Large scale traders or “whales” occasionally sell large amounts of cryptocurrency, sending values into a temporary free fall. The momentary drop in value can be exacerbated by automated trading programs that are designed to sell bitcoin and ether at certain prices to protect against losses.

But fluctuations as rapid and drastic as the one at the center of the CFTC letter aren’t normal. The price of ether returned to comparable levels within ten seconds of the crash, but traders using automated programs to protect against decreases lost huge sums of money.

Coinbase immediately disabled its margin trading feature, which increased losses for some investors who were trading with funds borrowed against what they already owned. The feature has not been restored and Coinbase says it has compensated users who lost money in the incident.

The company told the Financial Times in a statement that it is “unaware of a formal investigation,” but it had “proactively reached out to a number of regulators, including the CFTC.”

Regulators like the Securities and Exchange Commission (SEC) have begun to take an interest in cryptocurrencies, but have refrained from stepping in with regulations.

The SEC issued guidance against scams involving initial coin offerings (ICOs) — a new method startups can use to raise capital with cryptocurrencies — and announced on Tuesday that it would take action against two ICO scams.