Coinbase Rejects Proprietary Trading and Crypto ‘Market Maker’ Allegations

Coinbase vehemently denies that it engages in proprietary trading, but claims that some of its competitors do.

A Wall Street Journal report published Thursday alleges that Coinbase has hired traders to use the company’s own money to transact and wager crypto with the aim of making a profit. According to the report, $100 million worth of Coinbase funds was used in a test transaction that allegedly called “owned” an undisclosed number of unnamed Coinbase employees.

In response, Coinbase quickly wrote a blog after denying the claims, arguing that the report confused “customer-driven activities” with prop trading.

“Unlike many of our competitors, Coinbase has no proprietary trading activities and does not act as a market maker,” the company wrote, without specifying which rival exchanges it believes are involved in the practice.

“In fact, one of the competitive forces of our institutional Prime platform is our only agency trading model, where we only trade on behalf of our clients,” Coinbase added.

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While the self-described web3 company denies prop trading allegations, it occasionally buys crypto for its corporate coffers and operations, according to the blog post.

“We do not consider this to be proprietary trading as Coinbase is not intended to benefit from short-term increases in the value of the cryptocurrency being traded,” Coinbase wrote.

Given concerns about the past impact of prop trading on the U.S. economy, it’s not surprising that Coinbase is taking these allegations seriously.

Prop trading is controversial because it arguably contributed to the 2008 financial crisis. Prop trading, as described in the WSJ could violate the Volcker Rule, a regulation passed in 2010 in the wake of the financial crisis to prevent banks from making speculative investments, such as securities, commodity futures or derivatives trading.

The Federal Reserve has adopted the Volcker Rule as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is designed to reform the US financial system to prevent future crises.

While some believe prop trading by financial institutions is dangerous, others have their doubts. Despite the endorsement of his namesake rule, White House economic adviser Paul Volcker said long ago that he believes the prop trade “was there, but not central” to the 2008 crisis.

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But because Coinbase acts as an exchange for digital currencies, the Volcker rule could apply.

This is far from the first accusation Coinbase and its associates have faced in recent months. Last week, the brother of a former Coinbase product manager pleaded guilty on charges of conspiracy to commit fraud in connection with an alleged insider crypto trading system citing Coinbase announcements.

And last month, a subcommittee of the US Congress asked Coinbase, along with a number of other crypto exchanges, to “all documentsregarding how each investigates and handles fraud, alleging that the exchanges have not taken enough action to prevent illegal activity on their platforms.

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Coinbase has not yet responded to a request for comment from decode.

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