Written by Nichel Gaba
CEO and Founder- Philippine Digital Assets Exchange (PDAX)
Living through the COVID-19 pandemic over the past year, many of us have adapted to new ways of living and doing things. Digitalization is no longer just a buzzword, as even the most traditional companies have had to adapt. Once shunned by mainstream finance, digital currencies are gaining widespread adoption. Over the past 6 months, the largest banks in the world have either started trading crypto or advised their clients to do so. Catering to greater crypto demand from corporations and financial institutions, the largest global asset custodians have also started offering institutional support. Securities regulators, including our own SEC, have begun regulating digital assets for financial markets applications. Regulators in many countries, including the US, have also allowed banks to use cryptocurrencies and stablecoins as alternative modes of payment – something that our BSP did three years earlier. Here in the Philippines, where digitalization is critical to inclusive growth, adoption is moving at a much faster pace.
When PDAX was founded in 2018, the Philippine cryptocurrency market was very different. Yes, it was growing, but it was also filled with bad actors and Filipinos were more skeptical. There was also no open marketplace and cryptocurrency pricing was not transparent. In that environment, we would never fully realize the full extent of their innovative potential for remittances and financial inclusion.
We built PDAX not only to provide Filipinos access to cryptocurrencies and digital assets, but to do so safely, efficiently, and in a manner that provides transparency and promotes further innovation. As adoption of these new technologies continues to grow, PDAX will grow alongside it, investing, innovating and scaling up to better serve the Filipino market.
Last February 16, PDAX was inaccessible for an extended period – what happened?
When markets are very active, it’s not uncommon for exchanges to have outages. As Bitcoin prices hit $50,000 in February, PDAX experienced an unprecedented surge in activity, triggering a glitch that allowed a large ‘Sell’ order of BTC to be placed, without any underlying funding of BTC. In order to ensure that we contain the effects of the unfunded order, we immediately entered into maintenance mode to investigate and resolve the issue.
What does ‘Unfunded’ mean?
Normally, sellers are required to deliver assets to the exchange before they can place a Sell order, and buyers are required to deliver the payment before they can place a Buy order. This helps ensure that, by holding both the asset and the payment, PDAX can facilitate the exchange between buyer and seller quickly and with very minimal risk.
An unfunded order is a ‘Buy’ or ‘Sell’ order, which is not backed by enough assets or cash balance. In the case of PDAX, an unfunded order, to sell a large amount of bitcoins, was inadvertently placed, but because such a large amount of bitcoins was never actually on PDAX, we were forced to reverse the transactions. The unfunded Sell order of BTC was cancelled, and buyers were credited back their payments.
It was reported that, during the incident, many transactions were cancelled or reversed, even those that did not involve BTC. If the unfunded order only involved BTC, why were other transactions affected?
This is where, understandably, the reversals caused a lot of confusion and inconvenience. Because some of the users who were matched with the unfunded order of BTC ended up trading BTC for PHP, they eventually bought other assets like ETH, LTC or XRP. However, because these users were unable to buy BTC to begin with, they then could not have sold BTC for PHP or traded for other assets. As a result most of the resulting transactions became unfunded and needed to be reversed as well, affecting more than 2,800 users.
Don’t the PDAX terms and conditions state that trades are irreversible?
For trades that result from valid orders, yes. But in this case, the orders were placed without sufficient balances. Hence, also accordance with the terms and conditions, the transactions needed to be reversed. PDAX is only a marketplace that facilitates exchanges between buyers and sellers, assuming that both buyers and sellers have sufficient assets or cash. This is similar to buying an item from a store. Store policies might say “no refunds, no exchanges.” But if it turns out that the buyer only received an empty box (without the item), the legally the store must give the money back to the buyer.
Some users reported that they were able to withdraw. How is it unfunded if they were able to withdraw?
Similar to banks keeping cash at ATMs, PDAX ensures that its wallets have sufficient assets to facilitate withdrawals by users. Even though some users were able to withdraw, they did not actually have these assets in their accounts.
How can we trust PDAX that this will not happen again?
The root cause of the Feb 16 outage has been identified, and we’ve taken steps to manage and resolve the issue. Our platform is also being tested independently to ensure that this does not re-occur. As a regulated financial institution, PDAX was also fully compliant with the BSP’s requirements in handling the incident.
With the Philippine crypto markets growing more than 10x in the past year, PDAX certainly experienced issues and we have constantly improved the platform to get to where we are. The truth is that, as the market grows, PDAX will need to keep scaling, investing and innovating, in order to keep up.
While we wish we could guarantee that the platform will be perfect from now on, the reality is that technology isn’t perfect, even though sometimes we, rather unrealistically, expect it to be. Fortunately, we trust technology – all the apps, tools, vehicles and gadgets we use today – not because they never fail, but because we understand that the people behind them are committed to protect us. This is the same commitment that PDAX makes to our users: we will always work, within the bounds of laws and regulations, towards making digital asset markets safer, more efficient and more transparent for our users.
What can we expect from PDAX going forward?
We will be scaling up our infrastructure to make more digital assets available for trading, with enough liquidity, and we will continue to make various products and features more accessible through our apps. We are also expanding our team to support the increased user activity and make sure we deliver a great customer experience alongside great products.
As one of the pioneering exchanges, PDAX also remains committed to work with the relevant institutions, including the BSP and the SEC, to help foster innovative technologies towards greater financial inclusion.