As the cryptocurrency industry grew into a global behemoth, some projects became more equal than others. Chief among them are centralized exchanges that move billions of dollars worth of crypto every day. Coinbase is the largest American exchange and occupies a prominent position in this industry.
The powerful position of these players has added scrutiny to their operations. Some crypto users are inherently uncomfortable with centralized exchanges and instead transact using decentralized exchanges. Regardless, centralized exchanges like Coinbase still command the majority of transaction activity. Therefore, Coinbase occupies a position of care and trust in the crypto landscape, and its operations ought to be above board.
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Allegations of Insider Trading
Coinbase is facing allegations of insider trading over newly listed tokens and coins. These accusations are part of a concerted drive by analysts for exchanges like Coinbase to make public their favored cryptocurrencies.
For an exchange of its stature, Coinbase can affect the price of a token. Therefore, offering support and liquidity for specific newer tokens benefits the exchange in fees. Additionally, if the exchange purchases tokens before listing, they benefit immensely from the price surge once the listing is public. It is like using knowledge of a corporation’s profits a day before making the data public and purchasing stock before it is public.
The irony is that these allegations come amidst Coinbase’s push to be more transparent. Coinbase recently announced that it would start updating its users on tokens under consideration for listing.
The exchange has kept the information close to its chest. There is uncertainty about how this move will reflect in practice. The exchange stated that this was still the pilot phase of the disclosure to heighten transparency. Users are still waiting for information on listing decisions and criteria.
Crypto podcaster Jordan Fish (@Cobie) claimed that just before Coinbase announced that it would make listing news public early enough, he noted a mysterious Ethereum wallet bought hundreds of thousands of dollars exclusively of tokens to be listed by Coinbase.
If these allegations can be proven it is textbook front running. Only insiders would know that information and use it to make decisions before the general public is inherently unfair. Coinbase would benefit from its token holdings once the listing news bumps prices. Coinbase is a publicly-traded company that complies with the general company law. Insider trading is a standard offense for such companies.
Centralized Exchanges Must Improve Transparency
This is not the first time Coinbase faces these allegations. When the exchange was listing Bitcoin Cash in 2019, there were accusations that some employees bought the coin before its listing was public. Similarly, Nate Chastain, the former product head of OpenSea, had to leave the NFT marketplace after accusations of insider trading. Binance also came under scrutiny by the Commodities and Futures Trading Commission (CFTC) in 2021 for alleged insider trading.
Well, it would help if the SEC had settled on defining whether cryptocurrencies are securities or commodities. It is unclear if or how authorities would respond even if the allegations were true. Without clarity for regulators, some questions about exchange practices will remain dicey for users. Cryptocurrency is no longer a fringe industry that regulators can ignore.
Coinbase may be only trying to save face with the news of early disclosures. Some would regard the commitment to better transparency as an acknowledgment that there was impropriety. That said, any progress is welcome.
Coinbase has long sought to portray itself as a legitimate and compliant exchange that operates above board. These allegations are an inconvenient stain on this quest.
Lessons Learnt
Coinbase’s announcement that it will improve transparency is a welcome development. Even then, the proof is in the pudding. Coinbase has to back these promises with real action. Insider trading raises ethical questions both in mainstream markets and crypto. It does not matter if the listing is public three days or three months beforehand. What matters most is that those who know this information don’t use it to enrich themselves. If it means fewer people being kept in the loop, by all means. Either way, Coinbase, or other centralized exchanges, must earn and maintain user trust, given their powerful roles.
Image Source
- coinbase homepage: Coinsbase homepage screenshoot
