Coinbase Tested Group to Speculate on Crypto

Coinbase Tested Group to Speculate on Crypto

 

Coinbase Global Inc. has been looking for new ways to earn revenue. One business model it flirted with was debatable: using its own cash to speculate on digital currencies.

 

Last year, Coinbase global—which operates one of the largest Cryptocurrency exchanges that handles bitcoin and other major digital coins—recruited at least four senior Wall Street traders and launched a team to make profit, in part, by using the company’s cash to trade and “stake,” or lock up, Digital Currencies, according to the executives aware of the new strategic alternative. The activity was described as “proprietary” trading by the executives at the Coinbase global.

 

Earlier this year, the team completed a USD 100 million transaction that the group viewed as a test trade of the new strategic alternative, according to the executives in the company. The transaction came to notice after Coinbase global executives testified to members of Congress last year that the company did not buy and sell cryptocurrencies for its own account.

 

The months-long effort to launch the Coinbase Risk Solutions group underscores how Coinbase Global, which has seen its share price plunge about 70% over the past year, has entertained more aggressive strategies as it tries to find new strategic alternatives to generate profit.

 

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Coinbase Global says some executives at the company examined pursuing proprietary trading but decided against it. “Our statements to Congress precisely reflect our actual business activities,” a Coinbase global spokeswoman said. “Coinbase global does not, and has never, had a proprietary trading business model. Any implication that we misled Congress is a wilful falsification of the facts.”

 

The Coinbase global spokeswoman added that “Coinbase Risk Solutions was established to facilitate client-driven Cryptocurrency transactions,” and “conflict of interest mitigation tools and policies” were in place in the Coinbase global.

 

 

There are no regulatory instructions stopping firms like Coinbase global from trading digital currencies alongside their users.

 

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In the past, Global Investment banks operated proprietary trading teams that were active in stock and bond market trading, while also doing “agency” trading, or trading solely on behalf of their clients.

 

Guidelines on banks restricting speculative trading imposed in 2010 were eased somewhat a few years ago, and Coinbase Global was never subject to these restrictions. Still, regulatory bodies and politicians have long worried that speculative activity by firms like Coinbase global in nascent Cryptocurrency markets could harm customers. When a financial firm invests money for its customers at the same time it invests its own money in the markets, it can lead to potential risks and conflicts of interest with customers. For example, a firm buying or selling the same investments could drive up or down the price of these securities, hurting the customer is expected returns. 

 

In July of last year, Coinbase global established the Risk Solutions unit to trade cryptocurrency for clients. The group also made plans to start making trades with Coinbase Global cash, among other strategies, according to the executives close to the matter.

 

The team also built sophisticated trading systems and models to enable this trading, according to the Coinbase executives. Coinbase Global Chief Financial Officer Alesia Haas was involved in creation of the trading unit, which was led by Brett Tejpaul, Coinbase is head of institutional sales, trading, custody and prime services, the Coinbase executives said. Employees were discouraged from sharing data about the new trading business or discussing it in internal communications, the Coinbase executives said.

 

Also Read: Is Coinbase Exchange Doing Right By Your Staked Ethereum?

 

Neither Ms. Haas nor Mr. Tejpaul responded to a request for comment.

 

In December 2021, five months after the creation of the Coinbase Risk Solutions unit, Ms. Haas testified before Congress that “Coinbase global is an agency-only platform. We do not engage in proprietary trading on our exchange platform.”

 

When questioned by Rep. Alexandria Ocasio-Cortez (D, N.Y.), Ms. Haas reiterated that Coinbase global doesn’t do proprietary trading.

 

Later, the firm clarified its activities to Rep. Maxine Waters (D., Calif.) by saying that “Coinbase global does, from time to time, purchase Digital Currency as principal for specific purposes that we do not view as proprietary trading because its purpose is not for Coinbase global to benefit from increases in value of the cryptocurrency being traded.”

 

Also Read: Crypto Exchange Coinbase Enlists Broadridge Financial To Improve Liquidity

 

Earlier this year, after the testimony before Congress, Coinbase is Risk Solutions group completed its first, sizable transaction. It raised money for the transaction by guaranteeing a USD 100 million “structured note” that was sold to firm Invesco Ltd. at a fixed-rate of 4.01%, according to executives close to the matter. Coinbase global used the USD 100 million to generate profit in Cryptocurrency markets, according to the Coinbase executives.

 

An Invesco spokeswoman confirmed the transaction and said the investment firm had “no direct exposure to cryptocurrency” as part of the debt transaction, adding that “this is no longer an active holding position for us.”

 

The deal was profitable for Coinbase global, the people said, and Mr. Tejpaul appreciated the executives who worked on the transaction in internal communications and expressed eagerness to make more such transactions, the Coinbase executives said.

 

The trade occurred after the Cryptocurrency Market started to fall from its all-time high, eating into Coinbase global business.

 

Coinbase global subsequently soured on the idea of doing proprietary trading. In recent months, a number of senior traders who had been hired to help run the proprietory trading business model have left the company, the Coinbase executives said.

 

Analysts mentioned that Coinbase Global executives are trying to balance a need to maintain the company’s reputation for safety while diversifying its existing business model and finding new areas of growth and revenue generation. Coinbase global derives nearly all of its revenue from trading by individual investors—and lost USD 1.1 billion in the second quarter on the back of the cryptocurrency market crash.

 

“They do not want the public to perceive them as taking unnecessary risk…retail investors are concerned about the volatility of a trading platform,” says Mark Palmer, an analyst at BTIG. “But it is crucially important that the firm diversify because they remain overly dependent on transactions from retail clients.”

 

The firm is expanding its business in other different ways. Earlier this month, BlackRock, the world is largest asset manager, announced a partnership with Coinbase global. BlackRock is institutional clients who also own digital assets on Coinbase exchange will now be able to use Aladdin, the asset manager’s suite of software tools, to manage their portfolios and conduct risk analysis on investment and portfolio decisions.