Poloniex leaves itself open to legal threats by socializing 1,800 BTC loss

Legal questions hang over Poloniex, the cryptocurrency exchange, after a price crash in a little known alt coin forced the firm to liquidate the positions of traders on the platform.

What happened

On May 26, altcoin $CLAM collapsed more than two thirds of its value during the day, resulting in the margin lending pool incurring a 1,800 BTC, a more than $13 million USD loss in today’s price of bitcoin. Now, Poloniex is tapping into 1,800 BTC from the principal of active BTC margin loans to cover the loss to the lending pool. In margin trading, exchanges and traders can lend crypto at an interest rate for borrowers to trade, hopefully at a gain. Users have to pay back what they are lent. When a borrower is unable to pay back the loan, they default, losing money they didn’t have to begin with.

Some trading CLAM, a coin with low liquidity, began to default on their loans as the value of the coin dropped, making them unable to pay since their assets were now worth far less than when they borrowed.

Worse, many of those who defaulted had used CLAM for collateral on the loans, the amount put up to safeguard against an extreme loss for the lender, like a deposit. Since the coin had reached such a low value, that collateral became nearly worthless as well. While Poloniex said it is uncommon for traders to use CLAM as collateral, non U.S. traders can do so with any asset available for lending.

The number of defaults left the lending pool with 1800 BTC unrepaid by borrowers. To mitigate the loss, Poloniex “socialized” it among BTC margin traders. The exchange took 16.202% from the principal of all currently active BTC loans even those that weren’t active at the time of the crash.

While only affecting 0.4% of Poloniex users, this still incurred the ire of some BTC margin traders. But more than that, it raised questions about how losses can be sustained by crypto exchanges.

Can they do that?

Poloniex said it spread the loss among BTC lenders because the exchange pools loans on…

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