CFTC Hits Coinbase with $6.5 Million Penalty for Wash Trading and More

The Commodities Future Trading Commission (CFTC) has issued an order requiring Coinbase to pay a $6.5 million penalty for “false, misleading, or inaccurate reporting and wash trading.” Coinbase has settled the civil penalty with the CFTC.

The wash trading was said to be affiliated with a former employee on Coinbase’s GDAX platform.

The order requires Coinbase to cease and desist from any further violations of the Commodity Exchange Act or CFTC regulations.

According to the order, between January 2015 and September 2018, Coinbase delivered false or inaccurate reports concerning transactions in digital assets, including Bitcoin, on the GDAX electronic trading platform it operated. According to the CFTC, during this period, Coinbase operated two automated trading programs, Hedger and Replicator, which generated orders that at times matched with one another.

Additionally, the order said that while Hedger and Replicator had independent purposes, in practice the programs matched orders with one another in certain trading pairs, resulting in trades between accounts owned by Coinbase.

Coinbase was said to have included the information for these transactions on its website and provided that information to reporting services, either directly or through access to its website.

Reporting firms such as Crypto Facilities Ltd., which publishes the CME Bitcoin Real Time Index, and CoinMarketCap OpCo, LLC, which posts such transactional information on its website, received access to Coinbase’s transactional information via Coinbase’s API, while the NYSE Bitcoin Index, received it directly in transmissions from Coinbase.

According to the CFTC order, transactional information of this type is used by market participants for price discovery related to trading or owning digital assets, and potentially resulted in a perceived volume and level of liquidity of digital assets, including Bitcoin, that was false, misleading, or inaccurate.

The order also finds that over a six-week period, between August through September 2016, a former Coinbase 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 created the misleading appearance of liquidity and trading interest in Litecoin. Coinbase is therefore found to be vicariously liable as a principal for this employee’s conduct.

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

The penalty arrives just in advance of an anticipated initial public offering for the largest digital asset exchange in the US that should help to define the digital asset sector for the United States.

Wash trading has been an ongoing issue in the crypto exchange industry, most typically in exchanges that operate outside the US.

CFTC v. Coinbase 031921
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