Markets are kinder to those who enter the market earlier, with the late entrants having to play catch up. This steep curve can make it extremely hard to catch the leader in a sector. Companies try to employ varied tactics to overcome this disadvantage, and sometimes these things backfire. A fact that got highlighted recently when a stablecoin offered rebates to stimulate business interest only for traders to cash in on the opportunity and create problems for another coin, Paxos.
How Did This Come About
Crypto exchange Gemini decided to enter the crypto market with its own coin, last year, hoping to succeed on the back of the fact that the coin was backed by the US dollar. This would make it seem like a regulated and trustworthy option.
Unfortunately, while the coin has grown considerably to a total capitalization of $90 million it is still more than 30 percent behind its next competitor, Paxos. In a move to bridge this gap, Gemini resorted to offering their coin to some over-the-counter [OTC] traders at a 2% discount.
So What Is The Problem With That
This discount means that each $1 GUSD token was purchased at t$.98. Since the whole allure of a stablecoin is that its value stays in equilibrium with the USD, some traders spotted an opportunity for making a quick profit. They bought the GUSD at the discounted price and then converted it to Paxos’ stable coin, PAX. This effectively meant that the discount was converted to a profit for these traders.
What Happened Next?
While not ideal for Gemini it was a nightmare for Paxos. Most exchanges have some sort of daily limit on withdrawals. to make a quick buck and circumvent this restriction, many false accounts were created. Still worse was the fact that in order to encash the coins the request needs to be via the original issuer. As traders had exchanged vast sums of GUSD to PAX there were huge requests for withdrawals at Paxos end.
This was soon tracked and a quick investigation explained the plot. The CEO of Paxos, Chad Cascarilla explained, “Some customers began structuring withdrawals to get around them; they were creating accounts under other people’s names who were not the owners of the funds to try to withdraw more PAX than the $10k limit.”
The firm promptly tightened its processes for withdrawals, adhering fastidiously to Wall Street’s KYC norms. The exchange then began investigating any suspected account and holding off on payments.
This resulted in some backlash as some customers slammed them for causing them inconvenience for no fault of theirs. Most did not appreciate the fact that to redeem their PAX they were being questioned about the source of funds and the trading strategy involved. Some went on to accuse Paxos of deliberately delaying redemptions to preserve their market capitalization.
How Did Paxos Respond
To clear the air, the Paxos CEO, gave interviews to present his companies side of the story, which is that they are following procedure. “Every time a redemption comes in, and we’ve now processed $200 million, it goes through a compliance check.” Any anomaly or strange behavior is reported by the system which is then manually checked in detail
Cascarilla further pointed out how it was not in the interest of his firm to stop or hassle customers, however, he says “To operate legally, there are certain customers we cannot take — in this case specifically, customers who are trying to circumvent AML/KYC rules.
While understanding some innocents have been caught in the crossfire he happily points out “Every account we’ve closed has been connected to the Huobi incident.
So Rebates Are The Baddies?
Some commentators have been rather critical of Gemini’s approach and blame the whole saga on their plans for a discount. A market analyst from Themis Trading, Joe Saluzzi put it bluntly when he said “Sounds like Gemini was basically paying to get volume going in their stable coin. Reminds me of when BATS first started their exchange. They offered a pricing incentive to drive volume to their exchange and were willing to lose money to gain share.”
Yet this is a common practice even in this niche market with even Paxos having offered rebates in the past. Having said that, Dave Weisberger, CEO of CoinRoutes, notes the circumstances where he says ”There’s not a lot of liquidity in Gemini dollar pairs so if you’re Gemini you are going to want to come up with solutions to increase liquidity.” This motivates the coin issuer to think outside the box but led them to forget an all-important lesson. He reminds all that “If you fail to understand that market makers are not your friend, and you give them free arbitrage, then they are going to take it.'
While Gemini has declined to comment, it seems fairly straightforward with one company trying to gain a foothold in the market and inadvertently causing a lot of headache for another company's clients. However there seems to be no villainy, one hopes the purity of intent remains.