A major cryptocurrency exchange has been accused of proprietary trading. What does this mean?
Major US cryptocurrency exchange Coinbase has allegedly hired four Wall Street traders to trade digital assets for its own money. Such a strategy is called proprietary trading, which is when an exchange relies on income from its own capital transactions, in this case cryptocurrency transactions. As a reminder, the main source of revenue for the vast majority of exchanges is commissions from customer activity, and this kind of money-using scenario is unusual to say the least. We tell you more about what’s going on.
It should be noted that Coinbase representatives quite often announce changes to the company’s operations. For example, at the end of August 2022, exchange officials announced the launch of Coinbase One subscription, which provides certain bonuses. These include 24/7 phone support, no trading commissions for a certain amount and help with filling out tax forms.
In this way the company management is adapting to the realities of the market and wants to find new sources of stable income. However, during bearish trends, interest in crypto declines, which causes traders to make fewer trades. This has a direct impact on the platform’s earnings on commissions.
Coinbase logo in New York
According to sources, the exchange has allegedly engaged in a search for an alternative source of revenue.
How does the Coinbase crypto exchange trade?
According to CryptoPotato sources, information about Coinbase hiring traders appeared in an article by The Wall Street Journal. According to insiders, a division called Coinbase Risk Solutions has been launched within the company, where at least four experienced Wall Street traders have been hired. As early as 2022, the division was allocated an experimental sum of $100 million.
This capital was earmarked for trades in digital assets. The entire process was not made public, as proprietary trading could lead to a conflict of interest between the exchange and its clients. The exchange will use visible volumes for its trades, which could even be considered market manipulation, some experts say.
Coinbase chief executive Brian Armstrong
According to Coinbase employees, who wished to remain anonymous, their management’s strategy has even borne some fruit: the exchange has profited from the first experimental transactions. Key executives were also involved in the creation of Coinbase Risk Solutions – CFO Alesia Haas and Head of Institutional Sales, Trading, Custody and Prime Services Brett Tejpaul.
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Most interestingly, Coinbase raised funds for traders using a structured note sold to investment company Invesco Ltd. Official sources at Invesco confirmed the deal. However, shortly after the publication in The Wall Street Journal, a post appeared on the exchange’s official blog directly denying any rumours of proprietary trading.
The post says that Coinbase allegedly does not engage in “proprietary trading and does not act as a market maker,” that is, a party that provides liquidity to the market. The Coinbase Risk Solutions team only works with professional institutional investors who want access to cryptocurrencies. The company has stated that the aim of this team is to expand institutional investments to participate in the Web3 world.
A blog post denying involvement in proprietary trading was published very quickly
A Coinbase spokeswoman also made the following statement
Coinbase does not and has never had its own proprietary trading platform. Any suggestion that we have misled Congress is a deliberate misrepresentation. Coinbase Risk Solutions was created to facilitate customer-driven cryptocurrency transactions.
Last year, the U.S. Congress hosted a session where executives from major cryptocurrency companies, which included Coinbase, made their presentations. Even then there were rumours that the US exchange was using its funds for transactions, but Coinbase representatives explicitly told members of Congress that any accusations of proprietary trading were unfounded.
Coinbase CEO Brian Armstrong
We believe that allocating such a sum to cryptocurrency trading is too risky a decision for the current market conditions. In addition, the platform's management would surely be aware of the reputational risks if the scheme was disclosed, and the exchange's revenue dropped by 60 percent in the second quarter of 2022. One would like to believe that there will be some clarity to the story along with conclusive evidence.
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