Coinbase listed coins it had previously invested in without disclosing this
Coinbase has been busy listing new projects over the past two years. The Financial Times found that the exchange had previously invested in most of them but had not disclosed it.
Many crypto exchanges around the world have made headlines for shady dealings, with Binance standing out in particular. However, Coinbase has always had a clean slate, at least until now; however, it has now been revealed that the exchange is exhibiting questionable behavior by listing cryptocurrencies it has invested in without, however, disclosing this. There is a trend that once these tokens are listed on Coinbase, they quickly lose value, raising suspicions of insider dumping.
Coinbase is the largest crypto exchange in the US, and has been for a long time. She went public herself last year, in what was seen as the crypto industry’s finest moment. Binance was very demanding about the projects listed and refused to give in to pressure from traders who wanted new tokens added. Even when Binance was already listing hundreds of coins, Coinbase stuck to its stance. As recently as 2018, only six cryptocurrencies were listed.
Then came DeFi and everything changed. US consumers could go to Uniswap and co. and exchange their tokens easily, undermining the immense influence Coinbase had on the market.
Right since then, the exchange led by Brian Armstrong started adding new tokens every other month. The chart below shows how large the share of tokens other than the Big Two has become on Coinbase.
Traders were satisfied and rejoiced as their opportunities improved significantly. But was there malicious intent behind it? The Financial Times thinks so.
The Coinbase Insider Model: Invest in a project and then list it
There have already been allegations in connection with the listing process . Coinbase has been accused of leaking information about which tokens to list and allowing insiders to stockpile those tokens to pass to unsuspecting traders once listed. However, the Financial Times has now uncovered a new form of insider profit:
Let’s take the example of DESO, the native token of the blockchain project Decentralized Social for social networks. Coinbase listed the project in December last year and it skyrocketed, doubling its price and hitting over $180. What the exchange didn’t mention was that its own venture capital firm, Coinbase Ventures, had participated in a $200 million fundraising for the project three months earlier.
FT research revealed that DESO is one of 20 projects that Coinbase has taken public while also holding a previous investment. That in itself is by no means illegal – exchanges are allowed to invest in other projects. The problem lies in the disclosure. In traditional markets, all of a company’s moves must be disclosed to investors, especially when there could be a conflict of interest.
Although Coinbase lists the 20 companies on its platform, it only announced its investments in 12 of them this week.
When the Financial Times inquired about this practice, Coinbase was quick to respond and published a blog post to dispel any suspicions. Under the title “Proof of Alignment “, Chief Legal Officer Paul Grewal promised more transparency on the stock exchange in the future. One does not let one’s own investments influence the selection of projects.
“We do not coordinate asset listing decisions with anyone who is not directly involved in our screening and listing process. This includes members of our management team who do not sit on our asset listing committee.”
He also claimed that Coinbase Ventures has no control over the tokens the exchange lists.
While Coinbase Ventures made for good weather among the public, seven of the eight projects in which Coinbase Ventures had not disclosed its previous involvement were added.
It also updated the venture capital firm’s website and added dozens of token projects it had invested in but had not disclosed.
Insider dumping allegations
As a public company, Coinbase must comply with the regulations of the US Securities and Exchange Commission. However, there are a lot of gray areas in the crypto market that even the SEC doesn’t have clear guidelines for, and Coinbase seems to be doing a good job of identifying and exploiting them.
Tyler Gellasch, executive director of Healthy Markets, an investor trading group, commented:
“In the world of securities, conflicts of interest must be identified, disclosed and managed. In the crypto world, it seems like a free game.”
If these questionable tactics aren’t enough to worry investors, then the research by Faisal Khan, an independent crypto analyst, should.
Khan found that the tokens listed by Coinbase have, on average, underperformed Bitcoin and Ethereum. Although some have gone up after the stock market listing, they are still in the basement. The analyst added:
“Cryptocurrencies that Coinbase considered but did not approve of listing prior to 2020 have, on average, performed better than those that it chose to list.”
One could get the idea that Coinbase is simply cheating the traders. Khan says:
“I think that raises a lot of questions about insiders ripping off retail investors and conflicts of interest between venture capitalists and exchanges working together without any oversight.”
Coinbase denies cheating investors. In the aforementioned blog post, Grewal said, “Coinbase-Ventures has never sold tokens from investments it has made.”
You can believe that – or not.