On October 10, President Trump impromptu announced another set of proposed tariffs – this time on China at a rate of an additional 100 percent. The surprise declaration sent crypto markets spinning, with a reported (but unconfirmed) $19 billion in leverage evaporating, crypto prices falling, and 1.6 million traders liquidated.

Crypto data analytics firm Coinglass reported that the day’s market tumble was the “largest liquidation event in crypto history,” which is quite a milestone given that the crypto market is notorious for its volatility.

So why was this time so relatively bad compared to all the other crypto rollercoaster moments?

What led to Friday’s market crash was a build-up in leverage in the crypto ecosystem, exacerbated by infirmities in crypto market trading infrastructure. Crypto traders – from retail investors to hedge funds – borrowed money backed by their crypto holdings to try and juice returns. After all, more money gambled in the crypto market can lead to higher upside for traders when things go right (and more trading fees for exchanges). But when prices plunge, the damage is exacerbated.

This downward spiral can culminate in what’s known as “liquidation,” which refers to the process of a crypto exchange forcefully closing a trader’s leveraged position (also known as trading “on margin”) and snatching whatever crypto deposit the trader put down (both the initial collateral they ponied up and any subsequent collateral they may have posted as the exchange demanded a higher deposit as crypto prices dropped throughout the life of the trade). This is done algorithmically by crypto exchanges and also done automatically, with calculations about margin sufficiency conducted at a periodic cadence every few seconds or minutes. In essence, when crypto prices dip so low that the exchange’s algorithm determines that more collateral won’t cut it and the customer won’t be able to pay the borrowed funds back, the exchange will forcibly close the customer’s position and take all the crypto that they deposited during the trade.

These problems were then exacerbated by immature (and globally incongruent) crypto market structure. Taken together, the October Surprise in crypto markets tells us an important story, one that should inform the conversation in Congress around pending market structure legislation. As it currently stands, proposals being considered by lawmakers fail to address many of the fragilities exposed in this month’s rout. The good news is that policymakers have time to learn important lessons and react accordingly.

Read the full report here.