Dive Brief:
- Coinbase agreed Friday to pay $6.5 million to resolve a Commodity Futures Trading Commission (CFTC) investigation into claims that the cryptocurrency exchange reported "reckless false, misleading, or inaccurate" information about its trading volumes.
- From January 2015 to September 2018, Coinbase operated two automated trading programs, Hedger and Replicator, that generated orders that occasionally traded with each other, the CFTC said. Those trades were included among data Coinbase shared with reporting firms, which then posted the figures publicly — meaning the trades could have artificially inflated the volume and perceived liquidity of digital assets, including Bitcoin, the regulator said.
- Coinbase neither admitted nor denied the CFTC’s claims but noted, in a statement seen by The Wall Street Journal, that the regulator didn’t allege any harm to customers. "We proactively engaged with the CFTC throughout their investigation, and we believe that our conversations were constructive and contributed to an outcome that is satisfactory for both parties," the exchange said.
Dive Insight:
The CFTC order also alleged a former Coinbase employee, in August and September 2016, sought to intentionally give the appearance of inflated trading interest in Litecoin by placing matching buy and sell orders, in a pairing with Bitcoin, through a prohibited practice called wash trading, where trades are executed without transferring ownership of an asset.
Republican CFTC Commissioner Dawn Stump said she agreed that Coinbase violated anti-manipulation regulations but wrote in a statement that the regulator may have strayed from its priorities with the case.
The Commodity Exchange Act (CEA) gives the CFTC jurisdiction to regulate futures contracts, certain types of options and swaps, she wrote. But it doesn’t allow the CFTC to regulate exchanges involving cash commodity transactions. "Coinbase is a cash market that has never offered any derivatives products, and thus falls outside the scope of the CFTC’s regulatory authority under the CEA," Stump wrote.
She stressed repeatedly that the CFTC does not regulate Coinbase and doesn’t want the trading public to be misled into believing that it does. Further, she wrote to express "serious concerns about the Commission’s dedication of resources to this matter."
She cautioned the CFTC to maintain its focus on the derivatives market — its core area of responsibility — and that it cannot be the "cop on the beat" for misconduct involving cash digital asset exchanges.
"Coinbase’s activities concerning the digital assets at issue did not affect the trading of any listed derivatives product regulated by the CFTC because there were no listed derivatives products on digital assets traded at that time," Stump wrote. "The settled charges are based largely on conduct that is several years old, has not been repeated, and in the case of the charge of secondary liability, is based on conduct by an employee who left Coinbase years ago and who is not being charged."
Stump emphasized she does not condone Coinbase's conduct nor that of its former employee. "My point in writing is … to voice my concern about the implications of today’s action for the trading public, the American taxpayer, and the Commission’s priorities," she wrote.
Friday’s settlement wraps up an enforcement action ahead of Coinbase’s hotly anticipated initial public offering, which the exchange is delaying until April, according to Bloomberg.
The Securities and Exchange Commission (SEC) has been reviewing the company’s plans for a direct listing on the Nasdaq. Coinbase had earlier eyed a March IPO.
Recent private market transactions valued the company at $68 billion, Reuters reported Wednesday. That marks a nearly 13-fold jump since a $5.3 billion valuation in 2020’s third quarter, which ended less than six months ago.
The $68 billion figure is more than 50 times the company’s 2020 revenue, which Coinbase gave Wednesday as $1.3 billion. The exchange generated a $322.3 million profit last year, compared with a loss of $30.4 million in 2019, according to the financial statement it released Wednesday.
