Coinbase to Pay $6.5M for the Conduct of Illegal Trade Practices

  • CFTC alleges Coinbase was engaged in illegal trade practices and has to pay a penalty of $6.5M
  • From 2015 to 2018, Coinbase practiced self-trade and was involved in a wash trade
  • In 2016, a former unidentified Coinbase employee wash-traded Litecoin (LTC), creating an illusion of its increased interest and volume flow
  • Fine charged to Coinbase establishes that CFTC will investigate and penalize any illicit practice by exchanges in the United States

A few days earlier Coinbase announced its debut worth over $943M, marked as one of the greatest market debuts ever. After the agreement to pay a $6.5 million fine, it has made headlines again. Commodity Futures Trading Commission (CFTC)’s allegations of illegal wash trading practices is the reason for the fine.

CFTC Findings regarding Coinbase

The CFTC discovered that from 2015 to 2018, Coinbase, via two of its trading programs, was engaged in self-trade. Also, some amount of Litecoin (LTC) was wash traded by an unidentified employee at the exchange. And as a cover-up, Coinbase even gave misleading information to crypto services like the Coinmarketcap and the CME Bitcoin Real Time Index.

Among the two automation programs geared by their professional trading division GDAX (later turned into Coinbase Pro), one was to project the estimation of Coinbase’s cryptocurrency sale. The program then purchased the amount suggested and added it to the exchange’s treasury. Next, the system used Hedger and Replicator software which, CFTC believes, might have traded interchangeably, thus self-trade. This helped Coinbase boost the volume flow to report more activity than reality.

Wash Trade

Adding to that, from August to September 2016, for over six weeks, a former Coinbase employee intentionally placed buy and sell commands for LTC/BTC trade, creating an illusion of increased interest and volume flow in Litecoin. the major exchange is held responsible for the misdeeds of the employee too.

The timing led to Charlie Lee’s rumors, creator of Litecoin, being involved in this fiasco. At that time, he was Director of Engineering at Coinbase, and the trade benefitted Litecoin. However, the draft didn’t reveal any name, and Lee has yet to comment on the issue.

Signification

The CFTC this Friday also cleared that Coinbase’s activities didn’t harm or scam any user in any way. They consider this activity as rather “reckless” on their part. And also added no such activities are being conducted now.

The Acting Director of Enforcement Vincent McGonagle believes this fine charged to the crypto exchange will help establish CFTC’s footing as the ultimate guard of crypto-trade in the United States by investigating and penalizing any and every illicit practice conducted by exchanges.

Coinbase is very cautious and has agreed to pay the penalty since it doesn’t want to leave any dirty spots before its direct listing, and it even shut down the margin trading on Coinbase Pro.

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