Is the Coinbase effect giving the exchange an unfair advantage

January 30, 2022 Editor Coinbase 0

We know that the “Coinbase Effect” has turned into an industry-wide phenomenon. This is because any token’s listing by the exchange is known to give a positive push to its value. 

However, a recent report by the Financial Times suggests that Coinbase is profiting from its listing. For instance, last month, crypto-startup Decentralized Social issued its token DESO which later got listed on Coinbase. Soon after, the token’s value skyrocketed by 100%, benefiting the venture. 

FT reported that Coinbase’s venture arm was in fact a Venture capital (VC) firm backing Decentralized Social. While it raises questions about major conflicts of interest, DESO is only one of the at least 20 such listings by Coinbase as per the report. 

Here, it is also worth noting that Jack Dorsey, former chief of Twitter, had dismissed Web3 as a VC playing field in the past. 

In this regard, crypto-analyst Faisal Khan also explained how VCs are selling crypto to retail investors. He said, 

“If coins, especially VC-backed coins, consistently underperformed Bitcoin/Ethereum after listing on Coinbase, that says to me that insiders were waiting for a big, dollar-based exchange to list so they could sell – VCs taking profits at the expense of retail.”

Additionally, FT’s analysis found that it’s not Coinbase as a whole alone that has been benefiting from its token listings. Andreessen Horowitz and other leading venture capitalists who are also part of Coinbase’s board are also beneficiaries.

Soon after the report, however, Coinbase released a response to outline that Coinbase Ventures and Coinbase exchange are different entities, staffed separately. It further added,

“We do not coordinate asset listing decisions with anyone not directly involved with our review and listing process. “

However, experts argue that such rules are strictly followed when it comes to the stock market. Tyler Gellasch, Executive Director of the investor trade group Healthy Markets, told FT, 

“In the securities world, conflicts of interest have to be identified, disclosed, and managed. In crypto, it seems to be a free-for-all.”

And, according to research by Khan, the phenomenon is not limited to Coinbase Ventures. He argued, 

“Other exchanges like Kraken, FTX, and Gemini are also all active in venture, and have listed their own investments.”

So, the question arises if disclosure norms alone would be enough to safeguard retail investors when the VC pool clearly runs deep.