Coinbase Dealing Desk Plans Rekindle Market Manipulation Concerns

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Key points to remember

  • Coinbase hired a group of Wall Street traders to test a trading desk last year, The Wall Street Journal reported.
  • A representative of the exchange allegedly claimed that the office was set up for clients rather than its own trading activity.
  • Other top crypto exchanges and their senior executives have come under fire for their crypto trading activity in the past.

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Coinbase reportedly tested the trading arm after team members testified before Congress that it did not use its own accounts to trade crypto.

Coinbase Tests Trading Desk, WSJ Claims

Coinbase tested launching an internal trading desk in 2021, The Wall Street Journal reported.

Thursday report citing multiple sources familiar with the matter claim that the crypto exchange titan has hired at least four Wall Street traders to set up a “proprietary” trading desk called Coinbase Risk Solutions. The group was hired to trade and stake in crypto to generate profits, the sources said.

The report further adds that Coinbase Risk Solutions completed an initial $100 million transaction earlier this year after raising funds through a structured note it sold to Invesco. Coinbase employees were reportedly discouraged from sharing company information or discussing it in internal communications.

Several senior members of the Coinbase team testified before Congress in 2021, and they claimed that the company did not use its own money to trade crypto. Asked by the Wall Street Journal, a representative insisted that the company had not set up a proprietary trading desk. “Any insinuation that we misled Congress is a deliberate misrepresentation of the facts,” they reportedly said. The rep added that “Coinbase Risk Solutions was created to facilitate customer-focused crypto transactions,” but the sources claimed the company also weighs in by using its own cash for certain activities. Tradespeople who have been hired to Coinbase Risk Solutions has since left the company, according to the report.

Exchange bosses are trading on the market

In the United States, there are currently no restrictions preventing cryptocurrency exchanges like Coinbase from launching their own proprietary trading desks, despite growing regulatory concerns about possible market manipulation. Although none of the major exchanges focus on trading as part of their core business, some companies have generated controversy due to their senior officials actively trading in the market in the past.

Perhaps the best example of questionable business activity involving leading crypto exchanges on Sam Bankman Friedfounder and CEO of FTX and co-founder of the quantitative trading company Alameda Search. Before founding FTX, Bankman-Fried was best known in the crypto space for his exceptional trading skills, which helped him achieve billionaire status before the age of 30. FTX does not have a proprietary trading desk, but the close relationship it shares with Alameda has often raised questions about the ethics of exchanges and their staff who trade in the market, even after Bankman-Fried stepped down as CEO in 2021.

Alameda has become infamous for yield-producing crypto tokens and trading FTX’s perpetual short products, often resulting in steep price drops. Bankman-Fried has also been credited with ending crypto’s so-called “DeFi summer” period by throwing breeding Yearn Finance tokens into the market weeks after saving Sushi from collapse. While Bankman-Fried has retired from his trading company since FTX grew rapidly in 2021, his and Alameda’s ruthless market activity has become something of a running joke in the space.

Likewise, the co-founder of BitMEX Arthur Hayes rose to fame for trading in the market during his tenure as managing director of the derivatives exchange. A infamous screenshot suggests that Hayes engaged in market manipulation by ordering a colleague to “make the stops” on BitMEX clients because he “[needed] a new Ferrari. In May, Hayes has been condemned two years probation and six months house arrest for BitMEX’s failure to implement adequate anti-money laundering measures. He is still an active trader, however.

While Coinbase hasn’t gone as far as FTX or BitMEX and their best numbers, if The Wall Street Journal report is to be believed, the plans of the trading desk will undoubtedly raise concerns about the trading operations of the exchange.

Disclosure: At the time of writing this article, the author of this article owned SUSHI, ETH, and several other cryptocurrencies.

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