Major cryptocurrency trading platform Gemini’s recent discount on its own cryptocurrency has been a source of a headache for Paxos as opportunistic traders have swarmed in to take advantage of the profitability of the situation.
Gemini had recently announced that it was offering a 2% discount on the purchase of its own cryptocurrency, the Gemini Dollar (GUSD), according to a report by TheBlockCrypto. In other words, the GUSD was selling at $0.98 instead of its original $1.00. The deal involved going through a number of other exchanges, including exchanges like Huobi, which holds a large volume of GUSD.
However, traders were not too late to notice the opportunity to make a quick profit by “flipping” the currency. The traders bought GUSD at $0.98 and exchanged them for another cryptocurrency called Paxos (PAX) for $1.00, making a profit of $0.01 per Dollar invested.
It seems that Gemini introduced the discount in the first place to achieve greater adoption rates among users.
The practice involved, however unethical it may seem, is, in reality, a very common business in the finance world. Arbitrage, as it is commonly called, has been used for hundreds of years as a tool to control exchange rates by many financial institutions and is an important aspect of studying the economic behaviour of any stock market.
Thus, it doesn’t come as a surprise that arbitrageurs have jumped from making profits through fiat currencies in Wall Street to doing the same thing on cryptocurrency exchanges. However, the consequences of their actions have led the cryptocurrency companies involved in some trouble.
Although, Paxos has managed to nip the issue at its bud, or so to speak. Investors who tried to take advantage of the deal weren’t necessarily able to cash out their earnings. In order to redeem their PAX tokens, investors had to go through Paxos, not through an exchange.
Paxos did not elaborate on how much money was actually involved, but claimed that it had experienced a heavy surge in withdrawal requests in the time period:
“After Huobi recently instated $10k PAX withdrawal limits, some customers began structuring withdrawals to get around them; they were creating [fake] accounts… to withdraw more PAX than the $10k limit — as many as 30 accounts in the same day.”
Paxos took in the reins and got to work, tracking down suspicious accounts and taking the proper course of action against them. The company even managed to attain admissions of guilt from a number of users but conceded that it hasn’t stopped all traders from doing the same. As such, the team has confirmed that it will take further steps to make sure that this doesn’t happen again.