Cryptocurrency exchange giant Coinbase has dismissed claims that it flirted with the idea of creating an internal trading desk that would have used the company’s funds to trade and stake crypto. This was in response to an article by the Wall Street Journal that the US exchange tried to create a proprietary crypto trading desk.
Did Coinbase Try To Run an Internal Trading Desk?
Coinbase on Thursday issued a statement denying that it tried to create a proprietary trading desk. Today’s statement came in response to a WSJ report published earlier in the day. The WSJ report claimed that unnamed sources within the company say Coinbase wanted to create an internal trading desk last year.
Responding to the claims, Coinbase said:
“Unlike many of our competitors, Coinbase does not operate a proprietary trading business or act as a market maker. In fact, one of the competitive strengths of our Institutional Primeplatform is our agency only trading model, where we act only on behalf of our clients. As a result, our incentives and our clients’ incentives are aligned by design.”
According to Coinbase, WSJ misrepresented the exchange’s client-driven activities to mean that it was running an internal trading desk. The exchange platform stated that it does purchase crypto on behalf of its clients but that such activities do not constitute proprietary trading on its part. This is because the company says it does not earn profit from such activities.
The WSJ report stated that Coinbase hired some senior Wall Street traders in 2021. These traders were supposed to oversee a new business unit for the company to trade crypto. However, Coinbase has previously appeared before the United States Congress to state that it was not running a proprietary trading business. At the hearing held in December 2021, Coinbase executives maintained that the company was an agency-only exchange and it did not counter-trade its customers.
According to the WSJ report, Coinbase profited off a $100 million crypto trade from earlier in the year, weeks after the Congressional hearing. The report stated that the trade was carried out via the Coinbase Risk Solutions unit. This business unit was set up to trade cryptocurrencies on behalf of its clients. The success of this trade reportedly prompted the company to explore proprietary trading, the WSJ article further claimed.
However, Coinbase is said to have abandoned the proprietary crypto trading project. According to WSJ, some people within the company were not comfortable with creating an internal trading desk. The senior Wall Street traders hired to run the unit also left the company likely ending the planned endeavor.
What Does an Internal Trading Desk Mean for an Exchange?
Banks and exchanges use internal trading desks to trade assets with their own money. This action was once outlawed by regulators in the US but the law has since been relaxed significantly.
There is a danger in a bank or an exchange running an internal trading desk. The danger lies in the potential conflict of interest that may arise from such an enterprise. Due to profitmaking considerations, the bank or exchange could begin to countertrade their customers. Since a bank or an exchange can enter trading positions at size, it becomes possible for them to manipulate the price of the assets being traded. Their customers can end up losing their funds when this happens.
For Coinbase, even though it has dismissed the proprietary trading claims, the exchange has been looking for ways to diversify its business. The crypto market downturn has caused a significant dent in its fortunes. Between Q1 and Q2, Coinbase recorded a $1.1 billion shortfall in revenue. The company’s stock has also been downgraded by the S&P.