Coinbase Rejects Proprietary Trading and Crypto ‘Market Maker’ Allegations

The crypto exchange denies reports of a recent $100 million test trade that could be seen as “prop trading.”

By Kate Irwin

Coinbase is the leading crypto exchange in the U.S. Image: Decrypt/André Beganski

Coinbase vociferously denies that it engages in proprietary trading—but asserts that some of its competitors do.  

A Wall Street Journal report published Thursday alleges that Coinbase hired traders to use the company’s own funds to make trades and stake crypto with the goal of making a profit. According to the report, $100 million of Coinbase funds was used in a test trade that an undisclosed number of unnamed Coinbase employees reportedly called “proprietary.”

In response, Coinbase quickly wrote up a blog post denying the claims, arguing the report confused “client-driven activities” with prop trading.

“Unlike many of our competitors, Coinbase does not operate a proprietary trading business or act as a market maker,” the company wrote, without specifying which rival exchanges it believes engage in the practice.

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

While the self-described Web3 company denies the prop trading allegations, it does occasionally buy crypto for its corporate treasury and operations, according to the blog post. 

“We do not view this as proprietary trading because its purpose is not for Coinbase to benefit from short-term increases in value of the cryptocurrency being traded,” Coinbase wrote.

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

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

The Federal Reserve passed the Volcker Rule as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was designed to reform the U.S. financial system to prevent future crises. 

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

But Because Coinbase functions as an exchange for digital currency, the Volcker Rule could apply.

This is far from the first allegation Coinbase and its staff have faced in recent months. Last week, a former Coinbase product manager’s brother pleaded guilty to charges of conspiracy to commit wire fraud in connection with an alleged crypto insider trading scheme involving Coinbase listing announcements. 

And last month, a U.S. Congressional subcommittee asked Coinbase, along with a number of other crypto exchanges, for “all documents” pertaining to how each investigates and handles fraud, claiming the exchanges haven’t taken enough action to prevent illicit activity on their platforms. 

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