Coinbase’s trading desk plans revive concerns about market manipulation

Key takeaway

  • Coinbase hired a group of Wall Street traders last year to test a trading desk, the Wall Street Journal reported.
  • An exchange representative reportedly said the branch was set up for clients rather than their own trading business.
  • Other major cryptocurrency exchanges and their senior executives have been targeted for their cryptocurrency trading activity in the past.

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Coinbase reportedly tested the trading arm after team members testified before Congress that it was not using their accounts to trade cryptocurrencies.

Coinbase tests the trading desk, says WSJ

Coinbase tested the launch of an internal trading desk in 2021, The Wall Street newspaper has reported.

A report on Thursday citing several sources familiar with the matter said the cryptocurrency exchange titan hired at least four Wall Street traders to create a “proprietary” trading desk called Coinbase Risk Solutions. The group was hired to trade and stake cryptocurrencies to generate profits, the sources said.

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

Several senior members of the Coinbase team testified before Congress in 2021 and claimed that the company did not use its own cash to trade cryptocurrencies. When questioned by the Wall Street Journal, a rep insisted that the company had not set up a proprietary trading unit. “Any insinuation that we have misled Congress is a deliberate misrepresentation of the facts,” they would say. The rep added that “Coinbase Risk Solutions was established to facilitate customer-driven crypto transactions,” but the sources said the company was also considering using its own cash for some activities. The merchants for whom they were hired Coinbase Risk Solutions has since left the company, the report said.

Trade bosses trading on the market

In the US, 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. While none of the major exchanges focus on trading as part of their core business, some companies have sparked controversy due to their prominent figures actively operating in the market in the past.

Perhaps the best example of questionable trading activity involving major cryptocurrency exchanges centers around Sam Bankman-Fried, founder and CEO of FTX and co-founder of quantitative trading firm Alameda Research. Prior to founding FTX, Bankman-Fried was best known in the cryptocurrency industry for his exceptional trading skills, which helped him achieve billionaire status before age 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 operating in the market, even after Bankman-Fried stepped down as CEO in 2021.

Alameda has become famous for producing crypto tokens and trading FTX’s perpetual short products, which often result in brutal price drops. Bankman-Fried has also been credited with ending the so-called “DeFi summer” period of cryptocurrencies by dumping cultivated Yearn Finance tokens on the market weeks after saving Sushi from collapse. While Bankman-Fried has retired from his trading firm since FTX saw rapid growth in 2021, his ruthless market activity and that of Alameda have become something of an ongoing joke in space.

Similarly, BitMEX co-founder Arthur Hayes became famous for trading the market during his time as CEO of the derivatives exchange. A infamous screenshot suggests that Hayes engaged in market manipulation by ordering a colleague to “make stops” on BitMEX customers because “[needed] a new Ferrari “. In May, Hayes was sentenced to two years of probation and six months under house arrest for BitMEX’s failure to implement adequate anti-money laundering measures. However, he is still an active trader.

Although Coinbase hasn’t gone far enough from FTX or BitMEX and their best figures, if The Wall Street newspaper report is to be believed, the trading desk plans will undoubtedly raise concerns about the exchange’s trading operations.

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

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