On Thursday, a report from the Wall Street Journal alleged that publicly listed crypto exchange Coinbase had hired traders for using the company’s funds for making trades and staking cryptocurrency in order to make profits.
However, the United States-based exchange has vociferously denied that it engages in this activity, referred to as proprietary trading, but it did assert that its rivals certainly do.
The allegations
The report asserted that Coinbase funds worth $100 million had been used in a test trade that had been referred to as ‘proprietary’ by a number of undisclosed employees of the crypto exchange.
However, Coinbase did not take long to deny the claims via a blog post and argued that ‘client-driven activities’ had been confused with activity trading.
The company stated that, unlike its competitors, it does not function as a market maker, or engage in the proprietary trading business.
But, Coinbase did not specify exactly which rival exchanges it thinks to use this particular practice. The exchange highlighted that one of the competitive features of their Institutional Prime platform was the trading model.
This particular trading model allows the crypto exchange to only function on behalf of its clients and nothing more.
The activities
The blog post denied the prop trading allegations, but the self-proclaimed Web3 firm did say that it purchases crypto occasionally for its operations and corporate treasury.
Coinbase said that they do not regard these purchases as proprietary trading because the purpose is not to profit from the increase in value of the traded cryptocurrencies in the short-term.
It does not come as a surprise that these allegations have been taken rather seriously by the crypto exchange because of the impact on the US economy of prop trading in the past.
This kind of trading is considered controversial because it arguably resulted in the financial crisis that occurred back in 2008.
Volcker Rule
The kind of prop trading that was outlined in the WSJ report could be in violation of the Volcker Rule that had been passed by the Federal Reserve in 2010.
This regulation received approval after the financial crisis in order to prevent banks from making speculative investments, such as derivatives trading, commodity futures and securities.
It had been introduced as part of the Dodd-Frank Wall Street Reform and Consumer Act that had been aimed at reforming the financial system of the US to prevent crises in the future.
While there are those who think that financial institutions engaging in prop trading can be dangerous, others are doubtful.
Paul Volcker, the White House Economic Advisor, approved his namesake rule, but he had also said that he did not consider prop trading ‘central’ to the crisis that occurred in 2008.
Nonetheless, the Volcker Rule could be applicable because the Coinbase exchange serves as an exchange for digital currency.
This is certainly not the first allegation made against Coinbase recently, as it has been facing such problems of late, especially due to the increase in illicit activities in the crypto space.