A report has recently come to light indicating that this might be the case. This is despite Coinbase having, and keeps, insisting it does not partake in proprietary trading. As it is called.
What is Proprietary trading and is it illegal?
This is now of the ways a financial institution, like a bank or a CEX, can earn money. And in the majority of cases, it is not illegal. Normally a Bank or CEX will earn money from the fees they get from doing trades for their users. But proprietary trading is when instead of using other people's money they use their own money to make trades.
The problem is that generally, these financial institutions have a lot of money. And they have first-hand information about where their customer's money is or going to be. And this information can be used in order for them to make money at the expense of their customers. So while it can be very profitable indeed, in general, it can be frowned upon. Because they can prey on their own customers, trading against them.
One of the most egregious examples of this taking place, that I know of, was during the 2008 housing bubble. Here banks were taking bad loans, bundling them together, to now be able to call them good loans. And then the banks went on to bet their own money that the loans would falter. Loans themselves had approved. Bad loans. That they changed to look good.
Coinbase and their trading
What the issue now appears to be is a report published by The Wall Street Journal. In it, they are claiming that Coinbase has made a trade that is indeed proprietary. The trade is a single trade worth $100 million. And according to the report, this trade was made by the internal Risk Solutions group, a group that had been formed for the purpose of proprietary trading.
Do I have a deal for you
But if it is not illegal for them to do so, what is the issue here? The underlying issue appears to be the fact that Coinbase has claimed that they are not partaking in this sort of trading. And Alesia Hass their CEO of Coinbase’s U.S. subsidiary and chief financial officer of Coinbase Global. Have witnessed before the United States House of Representatives Committee on Financial Services on Dec. 8, 2021, in which she stated “We do not engage in proprietary trading on our platform”.
Coinbase response
Coinbase has published a blog post in response to the report and news story published by The Wall Street Journal, WSJ.
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 Prime platform 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,
In layman's terms, they are basically calling WSJ stupid for not being able to tell apart a hen from an egg. They are saying that the trade the WSJ refers to is in fact not proprietary. But a trade made for one of their clients. Thus making it a "normal" trade.
Personally, I feel that if the trade is taking advantage of the information they have because of their position as a trader. Then it should not matter if it is they who make the trade or if they do it for a customer.
Some of these investors are still getting familiar with crypto markets and ask for our assistance in managing risks and participating in protocols.
What I personally think is making this whole thing smell bad for me is this part in Coinbase's response. In short, it can very well be interpreted as if you got a lot of cash we can help you make more by proprietary trading, ops I mean normal trading. I do not see Coinbase bending over backward to offer this service to normal small-time traders.
And what is next, Coinbase could just set up a subsidiary, funnel their money to them and then have the subsidiary do the trade. Oh, it is a completely different thing, it is not proprietary trading it is "subsidiary trading".
What is your thought on this whole thing? Do you have any problems with Coinbase claiming one thing while it looks like they are doing the opposite? Please share your thoughts in the comment section down below.
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