Home Markets Coinbase has a serious insider trading problem, study finds

Coinbase has a serious insider trading problem, study finds

Coinbase has a serious insider trading problem, study finds

Three finance researchers from the University of Technology in Sydney, Australia, say insider trading is “systemic” in the cryptocurrency industry and believe such activity has taken place for up to 25% of Coinbase listings over the past four years.

In a yet to be peer-reviewed article titled Insider trading in the cryptocurrency markets“, Professor Ester Felez Vinas, Professor Talis Putnins and PhD student Luke Johnson estimate that insider trading took place on 10-25% of cryptocurrency listings on the San Francisco-based exchange between September 2018 and May 2022. The researchers say this resulted in at least $1.5 million in ill-gotten profits.”Our findings identify cases that have yet to be prosecuted,” they wrote.

They further argue that the growing perception of insider trading in crypto may scare away aware potential investors and could “hinder the adoption of cryptographically secure means of representing securities and other financial instruments.”— a perception that is largely supported by their findings.

In terms of methodology, the researchers reviewed 146 Coinbase listings and tracked their prices 300-100 hours before each new listing went live on the exchange to look for abnormal trading patterns of said assets on decentralized exchanges (DEX), which do not require identity verification.

“Based on visual inspection, we note that there is an evident acceleration pattern prior to listing announcement from -250 hours,” the researchers say.

“The ramp-up continues until the listing announcement event, where we see prices rising due to new information entering the market and traders reacting to the news. The ramp-up pattern that we we observe is consistent with the surges in prosecuted cases of insider trading in the stock markets,” they wrote.

But naysayers might argue that the wallpaper with a broad brush, applying Coinbase’s findings to the entire crypto industry as a whole.

A source familiar with trading practices on crypto exchanges said Decrypt that the study “jumps to conclusions” without providing clear evidence that insider trading has occurred or identifying wallet addresses that would have been in the foreground of token lists.

A representative from Coinbase said Decrypt via email that he “takes the front-run allegations incredibly seriously.”

“We work hard to ensure that all market players have access to the same information. As part of this effort, we are taking steps to minimize the possibility of technical signals during the asset testing and integration stages. We have zero tolerance for illicit behavior and we monitor it, conducting investigations where appropriate,” the Coinbase spokesperson said.

This isn’t the first time Coinbase listings have faced allegations of insider trading. The US Department of Justice recently charged the former Coinbase Product Manager Ishan Wahi with crimes associated with alleged insider trading while working at the company. Authorities say Wahi pre-shared Coinbase asset listing ads with two others in a scheme that earned them more than $1.1 million in profit.

Regarding Wahi’s allegations, Coinbase said in a blog post that he has “zero tolerance for this kind of misconduct and will not hesitate to take action against any employee when we discover wrongdoing”.

In the crypto industry, other allegations of insider trading have recently come to light. Former product manager of OpenSea Nathanael Chastain was also charged with insider trading after allegedly submitting NFT listings. OpenSea CEO Devin Finzer called the allegations “false framingin September last year and said the term “insider trading” did not apply to what happened.

But the Department of Justice seems to think otherwise. In June, he charged Chastain with wire fraud and money laundering in connection with alleged insider trading. Chastain knew in advance which NFT collections would appear on the OpenSea homepage and allegedly pre-purchased assets from those collections for personal financial gain.

August has already been a big month for crypto regulatory action. US lawmakers last week cracked down on controversial crypto mixing service Tornado Cashwhose use is now illegal in the United States

And as researchers and lawmakers continue to investigate the crypto industry, it’s possible this crackdown could be just the beginning.

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