Reports indicate that PDAX, the largest cryptocurrency exchange in Southeast Asia, failed under heavy volume, as Bitcoin began trading at $6,000, nearly 90% below market pricing. The exchange announced that the incident was not caused by hackers, but that, instead, it was a glitch triggered by high activity. The exchange has asked for traders to return Bitcoin purchased at the discounted rate.
“There’s a great deal of talk and outrage that the exchange is demanding the return of purchased Bitcoin. There’s even more outrage that customers have been locked out of accounts and threatened with legal action, but, in truth, that’s only a symptom of the real problem,” explained Richard Gardner, CEO of Modulus, a US-based developer of ultra-high-performance trading and surveillance technology that powers global equities, derivatives, and digital asset exchanges.
“The truth is that this is just the beginning. Most exchange operators lack the skillset to build out their own technology stacks. So, they use white-label technology to get to market faster. The problem is that most exchange technology providers are brand new to the exchange space and have rushed their products to market. They don’t understand the true pressures exchanges face during trading surges,” noted Gardner.
Modulus is known throughout the financial technology segment as a leader in the development of ultra-high frequency trading systems and blockchain technologies. Over the past twenty years, the company has built technology for the world’s most notable exchanges, with a client list that includes NASDAQ, Goldman Sachs, Merrill Lynch, JP Morgan Chase, Bank of America, Barclays, Siemens, Shell, Yahoo!, Microsoft, Cornell University, and the University of Chicago.
“These fly-by-night technology providers never count on an exchange to actually make it big. They expect them to flounder in anonymity, never facing true challenges, such as heavy traffic or experienced hackers. But, as an exchange grows, the quality of the technology that is required for smooth operation increases exponentially,” Gardner said.
“One thing that exchange operators should consider is where their technology provider is geographically-based. It sounds like a strange thing to place heavy emphasis on, now that we live in a flat world. But, in this case, geography is truly important because of the legal jurisdiction that goes along with it. When you utilize a technology provider that is domiciled in a country which prevents you from taking legal action, should the worst happen, as it has for PDAX, there is little to no recourse,” explained Gardner. “Many providers specifically choose to domicile in countries where they are protected from all liability for their failures.”
In the opinion of the attorney representing affected traders, transactions were “legitimate under applicable laws, decided cases, and of course according to PDAX’s very own terms and conditions/user agreement.”
“For an exchange, perhaps even worse than the financial hit stemming directly from a glitch, the more significant risk, long-term, is that, after being threatened with legal action, customers will lose faith in the exchange’s ability to serve as an honest broker. After all, if, when trading, they did act within the bounds of the terms and conditions of the exchange, it is fair to expect that they would get to keep the digital assets for which they paid, albeit at an extremely discounted rate. If PDAX survives the financial hit, it is entirely plausible that they cannot overcome the public relations disaster that follows,” extrapolated Gardner.