Lenders in Poloniex’ Bitcoin margin lending pool lost 1800 BTC last week, the US-based cryptocurrency exchange revealed in a Medium post published on June 6th.
Following the discovery of the loss, the exchange froze the accounts of the defaulted borrowers and has since announced that the accounts will remain frozen until borrowers repay their loans.
On May 26, a sudden, severe price crash in the CLAM market caused a number of margin loans to default, resulting in a roughly 1800 BTC loss in the Poloniex BTC margin lending pool for non-US customers.
— Poloniex Exchange (@Poloniex) June 6, 2019
The lending pool, which operates as a peer-to-peer platform, includes both borrowers and lenders. Lenders’ funds are pooled together on the platform–as such, the losses have been “socialized” (distributed among all lenders on the platform.)
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Poloniex took 16.202% from the principal of all active BTC loans in order to accomplish this–even loans that were not active at the time of the crash.
“Because all BTC loans on Poloniex are lent in a common pool that is shared across all markets and borrowers, but we want to emphasize that we are pursuing defaulted borrowers to get them to repay the BTC they owe to lenders and exploring other ways to defray losses,” a company spokesperson explained. “As we recover funds, we will return them to affected lenders.”
Poloniex is also taking some additional steps to prevent a similar incident from occurring in the future. Margin trading for CLAM and three other altcoins (MAID, FCT, and BTS) is no longer allowed; the exchange is also adding “additional market protections” and additional risk-monitoring layers.
Cryptocurrency news source The Block pointed out that this practice is illegal in the United States, and therefore could bring legal troubles to the exchange.
Here’s What Happened
The loss, worth roughly $13.5 million, occurred as a result of a flash crash in the Clams (CLAM) on May 26th. Over the course of the day, the coin lost over two-thirds of its value, causing many traders to default; their assets were suddenly worth much less than when the funds were borrowed.
What’s more, many of the borrowers who were forced to default on their loans had used CLAM as collateral. In other words, the collateral that had been put up by the borrowers to prevent extreme loss was suddenly worthless. The borrowers were then left holding the bag, suddenly having to pay back more money than they ever had in the first place.
While Poloniex said that it was unusual for any of its users to use CLAM tokens as collateral, there were a number of users based outside of the US who did so.