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Coinbase Trading Desk Plans Revive Market Manipulation Concerns

The top U.S. cryptocurrency exchange hired a group of Wall Street traders to trade and stake cryptocurrencies to generate profit, The Wall Street Journal has reported.

Coinbase Trading Desk Plans Revive Market Manipulation Concerns
Photo: Shannon Stapleton/Reuters

Key Takeaways

  • Coinbase hired a group of Wall Street traders to test out a trading desk last year, The Wall Street Journal has reported.
  • A representative from the exchange reportedly claimed that the desk was set up for clients rather than for its own trading activity.
  • Other leading 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 didn’t 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 has reported. 

A Thursday report quoting several sources familiar with the matter claims that the crypto exchange titan 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 crypto to generate profit, 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 venture or discussing it in internal communications. 

Several senior Coinbase team members testified before Congress in 2021, and they claimed that the firm did not use its own cash to trade crypto. When questioned by The Wall Street Journal, a representative insisted that the firm had not set up a proprietary trading desk. “Any insinuation that we misled Congress is a willful misrepresentation of the facts,” they reportedly said. The representative added that “Coinbase Risk Solutions was established to facilitate client-driven crypto transactions,” but the sources claimed that the firm was also weighing using its own cash for some activities. The traders that were hired for Coinbase Risk Solutions have since left the company, the report said. 

Exchange Bosses Trading the Market

In the U.S., there are currently no restrictions stopping cryptocurrency exchanges like Coinbase from launching their own proprietary trading desks, despite growing regulatory concerns over possible market manipulation. While none of the major exchanges focuses on trading as part of its core business activity, some firms have caused controversy due to their senior figures actively trading in the market in the past. 

Perhaps the best example of questionable trading activity involving leading crypto exchanges centers on Sam Bankman-Fried, the founder and CEO of FTX and co-founder of the quantitative trading firm Alameda Research. Before setting up FTX, Bankman-Fried was best known in the crypto space for his exceptional trading skills, which helped him hit billionaire status before the age of 30. FTX doesn’t have a proprietary trading desk, but the tight relationship it shares with Alameda has often raised questions over the ethics of exchanges and their staff trading the market, even after Bankman-Fried stepped down as CEO in 2021. 

Alameda has become infamous for yield farming crypto tokens and trading FTX’s perpetual short products, often resulting in brutal price crashes. Bankman-Fried was also credited with bringing an end to crypto’s so-called “DeFi summer” period by dumping farmed Yearn Finance tokens on the market weeks after he saved Sushi from collapse. While Bankman-Fried has stepped back from his trading firm since FTX saw rapid growth in 2021, his and Alameda’s ruthless market activity has become something of a running joke in the space. 

Similarly, BitMEX co-founder Arthur Hayes became notorious for trading the market during his stint as the derivatives exchange’s chief executive officer. An infamous screenshot hints that Hayes engaged in market manipulation by ordering a co-worker to “run the stops” on BitMEX customers because he “[needed] a new Ferrari.” In May, Hayes was sentenced to two years probation and six months house arrest for BitMEX’s failure to implement adequate anti-money laundering measures. He’s still an active trader, however. 

While Coinbase hasn’t gone quite as far as FTX or BitMEX and their top figures, if The Wall Street Journal report is to be believed, the trading desk plans will doubtless raise concerns over the exchange’s business operations. 

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

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