The US government’s Commodity Futures Trading Commission (CFTC) fined digital asset exchange operator Coinbase $6.5 million for “reckless false, misleading, or inaccurate reporting as well as wash trading by a former employee,” it said in a release on Friday. The issues that resulted in this penalty took place between January 2015 and September 2018.
Coinbase agreed to pay the fine without admitting or denying CFTC’s claim, clearing a major hurdle before its direct listing on the NASDAQ, according to the Wall Street Journal. Coinbase, which was founded in 2012 as a platform to trade cryptocurrencies, currently has 43 million users and 7000 institutional customers, according to the prospectus filed for its proposed listing.
The San-Francisco based exchange is one of the largest crypto-currency exchanges in the world. As India is grappling with the idea of regulating the industry, the investigation by the CFTC into internal trading algorithms and programs used by crypto-exchanges is significant for Indian regulators and policy makers.
Violations found by CFTC
Coinbase was operating two automated programs, Hedger and Replicator, on its GDAX (now known as Coinbase Pro) trading platform during this period. Although Coinbase disclosed that the company itself was trading on the platform, it failed to disclose that it was operating more than one trading program and trading through multiple accounts, the CFTC said.
It added that both programs Hedger and Replicator, at times carried out trades that matched each other in certain trading pairs. This resulted in trades between accounts owned by Coinbase. This is also known as self-trading, a situation where an entity takes both sides of the trade, the CFTC said.
Coinbase included these transactions as part of the statistics displayed on its website and as part of their filings with firms like Crypto Facilities Ltd, CoinMarketCap OpCo, and NYSE Bitcoin Index. This, according to CFTC, led to misleading information on the volume of trade of certain cryptocurrencies, including Bitcoin.
Furthermore, CFTC found that between August to September 2016, a former Coinbase employee carried out wash trades, a similar form of market manipulation in which someone simultaneously sells and buys the same instrument, to create a misleading impression of the liquidity of Litecoin. Coinbase was found to be vicariously responsible for this employee’s conduct.
Reckless, but not intentional
But CFTC does not indicate that Coinbase customers were harmed by these incidents and confirms that these wrongdoings are no longer taking place. It also describes the activity as reckless, but not intentional. CFTC Commissioner Dawn Stump said in a statement that she supported the regulator’s finding, but didn’t want the public to get the wrong impression that the agency has the authority to regular crypto exchanges and cryptocurrencies. It only has the authority to intervene when it suspects fraudulent activity.