tl;dr Summary: Coinbase, a leading crypto exchange in the US, has been accused by Cobie, a prominent crypto influencer, of insider trading in regards to a newly released list of assets the exchange plans to list.
Coinbase, the go-to crypto exchange for US citizens, has been accused of another insider trading scandal spreading mistrust on the policies of the exchange. Coinbase is known to list coins or tokens with high merits which include an audited and rigorously tested code, strong documentation about the project and a high degree of decentralization.
Coinbase was founded in 2012 by Brian Armstrong and Fred Ehrsam. It is known to be the largest crypto exchange by trading volume in the US. The distinguishing features of the exchange are its user-friendliness, regulatory clarity and high liquidity. However, the recent accusation suggests that the app is involved in untrustworthy and illegal actions, which has caused some users to express concern in the motives of the app creators.
Insider trading is basically the unfair disclosure of information to specific individuals regarding specific assets before that information is revealed publicly. This gives those traders a first-move advantage by purchasing the assets for a lower price before the news is public, and flipping the assets for a profit after the news becomes public. It is an unethical practice common in traditional markets as well.
This isn’t the first scam Coinbase has been accused of. One such lawsuit was filed against Coinbase in 2018 which claimed that Coinbase employees benefited from insider information before Bitcoin Cash (BCH) was listed on the exchange. BCH traded at much higher prices after it was listed and the employees who purchased BCH ahead of time were able to sell it for a profit.
Another such lawsuit was filed on the next day concerning Coinbase’s unfair business practices. It was alleged that Coinbase tried to claim cryptocurrency that did not belong to it, but instead to its users.
The Coinbase Effect
But why is a Coinbase listing so important? This can be explained by the Coinbase effect. Whenever it is announced that an asset will be listed on Coinbase, it automatically creates a price rally. This is due to the increased liquidity a Coinbase listing provides. Higher amounts of liquidity makes the coin or token easy to be bought or sold and increases growth potential. For example, consider a jug of water and a whole river to drink water from. The river has ‘high liquidity’ as hundreds of people would drink from it without significantly disturbing the water level. The jug on the other hand would not be enough to fulfill the demand of all the thirsty people. Hence listing an asset on Coinbase allows more buying and selling as it is now easily available.
Many investors that use Coinbase tend not to do their own research into an asset, only taking for granted that it is on Coinbase so thus must be a safe investment. Additionally, new listings translate into a large amount of retail interest and fear of missing out (FOMO) into the newly listed asset. Thus, the asset is likely to give double digit gains prior to the listing from all the hype developed.
Present allegations on the exchange
Considering such an effect Coinbase has on the price of an asset, it is essential that Coinbase conducts its due diligence in the listing of assets. However, the present allegation against the exchange points towards the contrary. The accusation is is regarding a list that Coinbase released of 50 cryptocurrencies on its Medium blogpost that it was considering listing in Q2 of 2022. The most notable assets were Morpheus Labs (MITX), Big Data Protocol (BDP), and Kromatika Finance (KROM). These assets skyrocketed 185%, 145%, and 204% respectively prior to the listing. Cobie, a cryptocurrency influencer, was quick to confirm that a specific Ethereum wallet had bought thousands of dollars’ worth of the assets 24 hours before Coinbase disclosed them to the public.
The assets were soon to retrace back almost halfway from their highs after the listing which confirms that the traders dumped the tokens on the retail investors, selling the tokens for a high price and leaving them deflated for all the other buyers. Such a sequence of events points towards what is called a ‘pump and dump’ scam. The fact remains standing that someone got the information before it was publicly available on Medium. Coinbase responded to Cobie’s accusation through a blog post on Medium, reassuring further investigation on the matter.
Coinbase’s Response to the Allegations
Coinbase CEO Brian Armstrong responded to the claims of the public by stating that Coinbase would change its policy to list assets such that they would not publicize the listing and do it silently. He explained that there are two ways in which traders benefit from a listing. One would be through on-chain activity; as the data of blockchains is available publicly, anyone can see the transactions of a particular token. Now, obviously tokens of a new project must be transferred to Coinbase in large sums, and testing of transactions must be done by Coinbase. These transactions can be noticed by experienced traders. The other possibility is leaked information from an insider. Armstrong reiterated that people committing such practices would be “terminated and referred to relevant authorities.”
The policies introduced by Coinbase include not publicly advertising the listing before it is available on the exchange, tagging an asset’s risk level, a system of ratings and reviews on the project and improving employee screening techniques to prevent such ill practices.
Conclusion
Coinbase is looked upon as a reputable organization for the exchange of cryptocurrencies. The services it provides are ideal for newcomers in the space. Many new crypto projects will rise and be the de factos of the new generation. The measures by Coinbase aim to remove disparities among the investors and make information available to all in symmetry. The effect Coinbase has is crucial for new projects to go mainstream so its integrity to be preserved is necessary.
