Despite new listing procedure, Coinbase faces fresh questions over frontrunning claims

On April 11, Coinbase announced a new process for listing tokens alongside a list of such tokens that the exchange was considering adding in Q2 2022.

The list included 45 Ethereum-based tokens and five that run on Solana, many of which have fairly small market caps and saw major boosts in spot price on the basis of the Coinbase announcement alone. 

Ethereum network data suggests that the owners of some crypto addresses may have known those considerations were soon to be made public.

The timeline

Coinbase Assets tweeted the announcement at 5:05 p.m. EST on April 11. Between 5:08 a.m. and 8:53 a.m. EST, the Ethereum-based address 0xcaD621da75a66c7A8f4FF86D30A2bF981Bfc8FdD sent just over 48 ETH (worth about $150,000 at press time) to newly created wallet 0x1C84a6d53F8950cd06a4016E5f547a089Dd7B6Fb. 

The second address proceeded to buy significant stakes in NDX, PAPER, RAC and KROM in the hours leading up to Coinbase’s announcement, using Uniswap, Sushiswap and Bancor. The wallet’s final orders for more KROM and RADAR went out and were filled in the hour following the announcement going live.

The holdings in that address had more than tripled in value on those trades, exceeding $380,000 before the wallet’s operator began draining it on April 14.

Kromatika, for example, saw its value peak at over $0.13 early on April 12, after lingering between $0.03 and $0.05 for months. Its price increase began well before Coinbase’s listing announcement went live. Kromatika’s market cap was $4 million at the beginning of April.

The discovery of the pre-announcement transactions surfaced on social media amid criticism of the tokens named in Coinbase’s post. Crypto investor and commentator Cobie shared findings on Twitter, and a post on the r/CryptoCurrency subreddit featuring his findings drew more than 19,000 upvotes and over 1,800 comments.

Coinbase did not respond to a request for comment from The Block.

This is not the first time something like this has happened to Coinbase. The Financial Times published an investigation into Coinbase’s practice of profiting off of the assets it lists in January. The new listing protocol is largely a response to such earlier concerns. Coinbase in its blog called the new standards “part of an effort to increase transparency by providing as much information symmetry as possible.”

Coinbase has also faced questions of insider trading when it comes to its own stock, COIN. In the context of its own stock, securities laws are stricter than for commodities — which most exchanges are presuming tokens to be at this point. Executive trades in COIN are also visible through public reporting requirements that don’t exist for commodities.

Crypto exchange rules at large

In this respect, crypto markets are in a regulatory gray zone, and standards for listing transparency or identification of market manipulation are still very much evolving. Central to the ongoing regulatory debate in the US is which federal agencies will have direct jurisdiction over crypto exchanges — or whether agencies like the Commodity Futures Trading Commission and the Securities and Exchange Commission may share oversight under a yet-to-be-finalized arrangement.

Last March, the Commodity Futures Trading Commission fined Coinbase $6.5 million for failure to disclose that it was using multiple engines to trade on its GDAX platform, and for an employee’s wash trading using that platform.

As a recent example from traditional markets, the Commodity Futures Trading Commission filed against Classic Energy last year for misappropriation of material, nonpublic information about a coming block trade. However, the mechanics of a new token listing are quite different from a block trade. A major crypto exchange will have a far bigger impact on the price of a small-cap token than any single exchange could have on a commodity with a larger more global market like, for example, West Texas Intermediate.

If crypto exchanges are treated as commodities markets, then it’s much tougher for the CFTC to bring a case in the event of possible trading on material non-public information — partially because they do not get information from spot markets as it becomes available, unlike the SEC. 

“It is a harder case for the CFTC to bring, but it does fall squarely in their authorities,” said former CFTC chief trial attorney Anne Termine. At the same time, she said, “If an exchange wants to announce ahead of time these are the tokens we’re considering, what they’re trying to do is take that out of the hands of people who are listening to rumors.”

In that particular point, it is also important to note that many comments on EtherScan identify the initial wallet, 0xcaD621da75a66c7A8f4FF86D30A2bF981Bfc8FdD, as belonging to a scammer. If the operator of the wallet learned of Coinbase's prospective listings by corporate espionage or hacking, then it would hardly be a legal liability for the firm.