Coinbase settles with CFTC for $6.5 million over data reporting, employee wash trading allegation

Coinbase has settled with the Commodity Futures Trading Commission, according to a Friday announcement, and will pay a $6.5 million penalty.

The settlement focused on two areas: information about trade activity on Coinbase's GDAX trading platform and allegations of wash trading by a Coinbase employee during a six-week period in 2016.

The U.S. regulator said that "between January 2015 and September 2018, Coinbase recklessly delivered false, misleading, or inaccurate reports concerning transactions in digital assets, including Bitcoin, on the GDAX electronic trading platform it operated." 

The issue was tied to two features of its institutional-focused exchange at the time, GDAX, that helped it interact with Coinbase's retail consumer platform. GDAX later became Coinbase Pro.

One feature, Hedger, projected how much inventory the firm would need from its institutional exchange GDAX.  Transfers between the two venues would be reported as trade volume, which the CFTC deems as erroneous reporting. Furthermore, another feature, dubbed Replicator, would replicate the depth of the primary order book for a specific asset across order books in other pairs. The firm never disclosed these features to its clients, according to the CFTC. 

"According to the order, transactional information of this type is used by market participants for price discovery related to trading or owning digital assets, and potentially resulted in a perceived volume and level of liquidity of digital assets, including Bitcoin, that was false, misleading, or inaccurate," the CFTC said. 

Additionally, the regulator honed in on alleged wash trading that took place on the platform.

"The order also finds that over a six-week period—August through September 2016—a former Coinbase employee used a manipulative or deceptive device by intentionally placing buy and sell orders in the Litecoin/Bitcoin trading pair on GDAX that matched each other as wash trades. This created the misleading appearance of liquidity and trading interest in Litecoin. Coinbase is therefore found to be vicariously liable as a principal for this employee’s conduct," the CFTC said in its statement.

As the consent order further explained:

"On some days, Employee A’s wash trades in the Litecoin/Bitcoin trading pair between accounts he owned and controlled, made up a substantial percentage of the trading volume in the contract, ranging from as little as 0.62% to as much as 99.0% of the daily trading volume." 

Per the consent order, which is embedded below, Coinbase did not admit to or deny the CFTC's findings.

Word of the CFTC inquiry was featured in the company's S-1 filing, published last month ahead of its planned direct listing. In the filing, Coinbase said that in July 2017, the agency "commenced an investigation that has covered topics including an 2017 Ethereum market event, trades made in 2017 by one of the Company’s then-current employees, the listing of Bitcoin Cash on the Company’s platform, and the design and operation of certain algorithmic functions related to liquidity management on the Company’s platform."

CFTC commissioner Dawn Stump commented on the settlement in a concurring statement, stressing the desire "to ensure the public is not misled to believe that the CFTC regulates exchanges such as Coinbase. It does not."

Stump effectively took the agency to task for its investigation, and went on to write that "the charges against Coinbase being brought and settled by the Commission are based largely on conduct that is several years old."

"While I concur in the findings and terms of the settlement Order before us today, I question whether the Commission has fulfilled the foregoing responsibilities in this case," she concluded.

Enf Coin Base Order 031921 by MichaelPatrickMcSweeney on Scribd

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