According to Reporter Jaclyn Jaeger, writing in ComplianceWeek, Coinbase, a digital currency exchange operator, has agreed to pay a $6.5 million civil penalty to settle charges brought against it by the Commodity Futures Trading Commission (CFTC). The issue? Reporting violations and improper trading activity by a former employee.

What were Coinbase’s failures?

According to the CFTC, between January 2015 and September 2018, Coinbase “recklessly deliver[ed] false, misleading, or inaccurate reports concerning transactions in digital assets, including Bitcoin, on the electronic trading platform it operated, GDAX.” The company was reported to be using two automated trading programs: “Hedger,” which maintained inventory for the platform’s brokerage business, and “Replicator,” which operated to maintain liquidity on GDAX.

The CFTC reports that there were times when both platforms generated matching orders. Coinbase posted information from these specific transactions on its website and shared that data with reporting services. As a result, the CFTC notes, was “a perceived volume and level of liquidity of digital assets, including Bitcoin, on GDAX that was false, misleading or inaccurate.

“The GDAX Trading Rules,” the CFTC writes, “specifically disclosed that Coinbase was trading on GDAX but failed to disclose that Coinbase was operating more than one trading program and trading through multiple accounts.”

What were the Coinbase wash trades?

From August through September 2016, a former Coinbase employee intentionally placed buy and sell orders in the Litecoin/Bitcoin trading pair on GDAX that matched each other as “wash trades.” These schemes, says the CFTC, “give the appearance of trading but actually no bona fide, competitive trade has occurred.”

According to the CFTC order, the result was the creation of a “misleading appearance of liquidity and trading interest in Litecoin,” adding that Coinbase is, therefore, “vicariously liable as a principal for this employee’s conduct.”

CFTC Commissioner concurs

In a concurring statement, CFTC Commissioner Dawn Stump says that while the CFTC does not regulate cash digital asset exchanges, such as Coinbase, she agrees that the exchange violated anti-manipulation provisions of the Commodity Exchange Act and the agency’s rules. Still, she adds, I have “serious concerns about the Commission’s dedication of resources to this matter [and] that today’s settlement falls short on [the following,” because it is essential that the CFTC, must:

1. maintain its focus on its primary area of responsibility—the derivatives markets; and
2. be transparent with the public that the Commission does not regulate cash digital asset exchanges like Coinbase.

Where was Coinbase compliance?

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