Between January 2015 and September 2018, Coinbase “recklessly deliver[ed] false, misleading, or inaccurate reports concerning transactions in digital assets, including Bitcoin, on the electronic trading platform it operated, GDAX,” the CFTC stated in its order Friday. Coinbase was utilizing two automated trading programs: “Hedger,” which maintained inventory for the platform’s brokerage business, and “Replicator,” which operated to maintain liquidity on GDAX.
At times, the platforms would generate orders that matched one another. Information from these transactions were posted on Coinbase’s Website and provided to reporting services, “resulting in a perceived volume and level of liquidity of digital assets, including Bitcoin, on GDAX that was false, misleading or inaccurate,” the CFTC stated.
“The GDAX Trading Rules specifically disclosed that Coinbase was trading on GDAX but failed to disclose that Coinbase was operating more than one trading program and trading through multiple accounts,” the CFTC said.
The order also finds that, from August through September 2016, a former Coinbase employee intentionally placed buy and sell orders in the Litecoin/Bitcoin trading pair on GDAX that matched each other as “wash trades.” The CFTC defines “wash trading” as a scheme that “give[s] the appearance of trading but actually no bona fide, competitive trade has occurred.”
“This created the misleading appearance of liquidity and trading interest in Litecoin,” the CFTC said. Coinbase is, therefore, “vicariously liable as a principal for this employee’s conduct.”
Commissioner shares concerns
In a concurring statement, CFTC Commissioner Dawn Stump said she agreed Coinbase violated anti-manipulation provisions of the Commodity Exchange Act and the agency’s rules but stressed the CFTC does not regulate cash digital asset exchanges, such as Coinbase. “That important point bears repeating, because it is not made anywhere in the Commission’s settlement order: The CFTC does not regulate Coinbase,” she wrote.
Stump further expressed “serious concerns about the Commission’s dedication of resources to this matter.” The CFTC, she wrote, “must: 1) maintain its focus on its primary area of responsibility—the derivatives markets; and 2) be clear with the public that the CFTC does not regulate cash digital asset exchanges like Coinbase. I fear that today’s settlement falls short on both objectives.”