VeChain robbed of $6.5 million, Binance reportedly disables VET margin shorts
Regulated exchanges have circuit breakers to control trading. Should crypto exchanges have their own?
"On December 13 2019, due to human error and mismanagement of private keys by our staff, the VeChain Foundation buyback address was compromised," VeChain CEO Sunny Lu announced.
About US$6.5 million of VeChain tokens (VET) were stolen. According to VeChain, "the incident was caused by the fact that the private key of [the] buyback address was stolen during the wallet creation process."
Basically, someone made a $6.5 million mistake.
There are several ways someone could have done this, such as Googling for an online key generator and selecting a scam, creating keys on a compromised computer or insecure Wi-Fi network, taking a selfie at work that shows the private key in the background and posting it on social media or creating a wallet in a public place while using the largest font size possible and reading each character of the private key out loud.
"Going forward, we will improve our Standard Procedure to prevent unfortunate incidents such as this to ever happen again," VeChain says.
Opinion: Eat my shorts
This incident may have also highlighted an interesting response to these kinds of problems from exchanges. According to The Block's Larry Cermak, Binance disabled margin shorts for VeChain when the news broke, supposedly without any kind of official announcement.
It's another interesting turn in the ongoing question of whether and how crypto exchanges should control trading activity on their platforms.
At first glance, all this is entirely unreasonable. An exchange should not prevent people from margin shorting a token when that token experiences bad news and doing so is precisely counter to the whole point of shorting.
It's also quite telling that only shorts have been disabled, while margin longs are apparently still perfectly acceptable.
Cermak also says Binance disabled margin shorting for Matic following its latest bout of bad news. But Matic's "bad news" was simply that its prices plummeted because a whale dumped the market. Exchanges really shouldn't be able to just prevent short-selling whenever the market moves in a direction they don't like. That's starting to smell a lot like manipulation.
Then again... circuit breakers are a perfectly normal feature of regulated security exchanges. These are regulatory trading controls that either stop trading, or close trading early, when markets move too fast. Depending on how you look at it, these circuit breakers are either used to prevent irrational trading and limit delusional trader hysteria in the short term or maintain irrational trading and encourage collective delusion in the long term.
It's not that unreasonable that an exchange would start experimenting with its own circuit breakers, and arguably it would be preferable if more exchanges were willing to experiment with their own restrictions.
It's also worth noting that, in the case of VeChain, shutting down margin shorts probably would have made the market response more rational, rather than less. That's because this VeChain theft isn't a particularly big deal. A rational market response to this theft would be almost imperceptible. It would be a total VET market cap reduction of $6.5 million, minus the value of one impromptu lesson in private-key management.
From a strictly ethical perspective, it's hard to argue that there's something inherently wrong about protecting VET token holders from an irrational price plunge.
What's the point of an exchange?
The problem is perhaps that markets are just irrational, emotionally-disordered sentiment gauges and no one has ever figured out how to manage them or value an intangible asset accurately.
Bitcoin was "correctly" priced at $1 and $10,000 even though the product itself didn't change, and Peloton's market cap shed almost $1 billion when people pointed out that its new ad campaign was creepy and weird, even though the product didn't change. WeWork was "correctly" valued at both $47 billion and $5 billion, XRP's market cap is higher than MoneyGram's and no one's entirely sure how much each Facebook user should be valued at.
And as Cermak alluded to, Elon Musk has argued with some merit that short selling should be illegal, while defenders of the practice argue that it helps markets behave more rationally. Unfortunately, it's quite rational to expect markets to behave irrationally.
Whether Binance's trading controls are a good or a bad thing probably depends on what you think the actual purpose of a market is.
Some exchanges are venues for experienced traders to get rich at the expense of retail punters, while others are for entertainment or for retail traders to try their luck. Some are places to purchase things for later use or just in an effort to buy low and sell high, and others are places where crowd wisdom is meant to distil the fair price of an asset.
Security exchange regulations have resulted in one-size-fits-all circuit breakers that control the entire market, but in their little-regulated space, cryptocurrency exchanges still have some room to try out their own systems to best suit their actual purpose as an exchange.
A lot of people will complain about Binance's reported trading controls, but on the whole, it's difficult to see it as a particularly bad thing instead of just one more interesting experiment in cryptocurrency.
Disclosure: The author holds BNB and BTC at the time of writing.