Exchange Bankruptcy Sample Clauses

Exchange Bankruptcy. Cryptocurrency exchange regulation is underdeveloped and ambiguous. Typically, customer margin deposits at a cryptocurrency exchanges are not covered by any pro- gram like the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC). In bankruptcy, depositors are treated as unsecured creditors – it is not the case that customer margin balances are considered the “cus- tomer’s property.”23 This is important since Cryptocurrency exchanges businesses are risky. There is a long list of prominent, high-volume exchanges that have failed: from MtGox in February of 2014 to FTX in November of 2022.24 The impact of exchange bankruptcy risk for the crypto carry trade depends on how the trade is executed. Recall, the trade is long a “physical” coin and short an exchange- traded perpetual futures contract. Storing the long coin on the exchange as margin is a convenient method of execution. However, that convenience comes with a large loss if the exchange fails. An execution strategy with less exchange exposure holds the long coin off of the exchange (in a wallet) and keeps the margin balance at the exchange small. To quantify the risk, implement the crypto carry trade so that the margin balance at the beginning of each period to be αFt, where α is the margin ratio. Table 13 shows returns for a Tether-denominated contract and Table 14 shows returns for coin-denominated contract.25 The returns depend on whether the exchange is solvent 23“Bad News for 500K Crypto Investors: They Don’t Own Their Accounts,” Xxxxxxxx, January 07, 2023, or “FTX’s International Customers Lawyer Up, Ask Judge to Rule That Customer Assets Aren’t Property of FTX Estate,” Coindesk, December 30, 2022.‌ 24Even prior to the MtGox failure in 2014, many exchanges failed. See Xxxxx and Xxxxxxxx (2013). 25Tables 13 and 14 assume the margin position is sufficient to cover the perpetual position. Recall, that even for a modest level of α, the likelihood the on-exchange margin cannot cover trading losses of the on-exchange perpetual contract, requiring injecting more funds into the exchange, over the 8-hour window is small – see Figure 10(a)). or bankrupt. As above, it is helpful to abstract from the basis risk and assume Ft = Pt at each date and consider log Ft+1/Ft ∼ N (µ, σ2). The log-approximation of the returns (last line in each Table 13 and 14) helps make things clearer. Letting λ represent the probability that the exchange goes bankrupt over the trading w...