Coinbase settles $6.5m with CFTC for false reporting and wash trading

The Commodity Futures Trading Commission has settled charges against Coinbase Inc. for “reckless false, misleading, or inaccurate reporting” as well as “wash trading by a former employee on Coinbase’s GDAX platform”.

The digital asset exchange operator will pay a civil monetary penalty of $6.5 million in order to settle the charges.

Vincent McGonagle, Acting Director of Enforcement of the CFTC, commented: “Reporting false, misleading, or inaccurate transaction information undermines the integrity of digital asset pricing. This enforcement action sends the message that the Commission will act to safeguard the integrity and transparency of such information.”

The CFTC alleged that Coinbase delivered false, misleading, or inaccurate reports concerning transactions in digital assets on the GDAX trading platform between January 2015 and September 2018.

Coinbase automated trading programs, Hedger and Replicator, generated orders that at times matched with one another. The GDAX Trading Rules failed to disclose that Coinbase was operating more than one trading program and trading through multiple accounts.

As Hedger and Replicator matched orders with one another in certain trading pairs and then provided the information for these transactions on its website and to reporting services, Coinbase misled the market.

Reporting firms such as Crypto Facilities Ltd., which publishes the CME CF Bitcoin Real Time Index, and CoinMarketCap OpCo, LLC, used the misleading trading data from Coinbase for price discovery and potentially resulted in a perceived volume and level of liquidity of digital assets, including Bitcoin, that was false, misleading, or inaccurate.

The CFTC order also charged Coinbase for being “vicariously liable as a principal” for a former employee’s conduct. Over a six-week period—August through September 2016, the former employee used a manipulative or deceptive device by intentionally placing buy and sell orders in the Litecoin/Bitcoin trading pair on GDAX that matched each other as wash trades.

This practice, also known as “wash trading”, misleads the market in regard to liquidity and trading interest in Litecoin.

CFTC Commissioner Dawn D. Stump has already come forward to say the CFTC does not regulate Coinbase and to express “serious concerns about the Commission’s dedication of resources to this matter involving an exchange for cash transactions in digital assets”.

Kraken, the US-based cryptocurrency exchange that acquired Crypto Facilities in early 2019, has clarified to FinanceFeeds that the provider formerly known as Crypto Facilities now trades under the name CF Benchmarks.

“CF Benchmarks has since checked historical data between January 2018 and September 2018 (the timeframe related to the CFTC settlement) and found there was no material disparity in the price when Coinbase data was excluded”, said the spokesperson, explaining “that’s because CF Benchmarks’ indices take order data from more than one exchange (was four at the time, is now five), which makes them particularly resilient.”

Sui Chung, CEO of CF Benchmarks, commented on the matter: “Due to the BRR’s robust construction and sourcing data from multiple exchanges, it does not have a reliance on any individual exchange.

“CF Benchmarks employs the most rigorous criteria in screening its constituent exchanges and monitoring the data they publish. One of the ways we do this is to calculate what the BRR value would be if any one of the exchanges were removed. As you can see the impact of removing Coinbase from the index would have been minimal in this period – a maximum impact of less than 1% to the published BRR value. This further evidences our strong controls and vigilance to ensure the integrity of the BRR.”