Digital asset trading platform Coinbase took a $6.5 million hit on Friday when the Commodity Futures Trading Commission announced it had settled charges against the firm. The agency charged Coinbase with “reckless false, misleading, or inaccurate reporting as well as wash trading.”
Coinbase did not deny the charges. “Respondent consents to the use of the findings of fact and conclusions of law in this Order … and agrees that they shall be taken as true and correct, ” according to the CFTC’s order. The charges stem from activities by the company that occurred before September 2018, old news in other words.
In its February 25, 2021 S-1 (prospectus document) filing with the Securities and Exchange Commission, Coinbase said it had profits of $322 million on net revenue of $1.14 billion in 2020. The privately held company is preparing for a direct listing of outstanding shares. The then-ongoing CFTC investigation was disclosed in the filing.
Coinbase shares that were recently sold by investors on private markets have valued the company at between $60 billion and $90 billion. Up to almost 115 million shares were registered by Coinbase for sale on Nasdaq during its debut.
Delay for the public listing?
On the heels of the government’s announcement, Bloomberg reported that people with knowledge of the matter had told its reporters that the much-anticipated public listing would be delayed until April. A March debut was widely expected. Coinbase did not comment on a possible delay.
In the Coinbase S-1, the company says that certain of its transactions “may constitute retail leveraged commodity transactions” subject to regulation by the CFTC. The company publicly struggled with the CFTC over the issue until the agency published “interpretive guidance” on March 24, 2020.
Coinbase waited eight months before it suddenly stopped offering margined retail accounts, telling its customers, “Due to recent [sic] changes in our regulatory environment, we are no longer able to offer this product to retail investors.”
Even after the abrupt halt to Coinbase’s leveraged cryptocurrency transactions, confusion continued over the extent to which margined, cash-settled (or at least non-delivered) contracts are subject to registration and regulation by the CFTC.
In a lengthy concurrence to the CFTC order against Coinbase, CFTC Commissioner Dawn Stump jumped into the muddle with this statement: Coinbase has not offered any futures contract, option, or swap (collectively, “derivatives products”) regulated by the CFTC; as a result, Coinbase is not required to register with, and is not regulated by, the CFTC.”
That seems to mean that Coinbase can get back to offering its retail customers margined bitcoin contracts. (That statement may come as some relief to the multi-billion dollar platform because the fees they earn from that business can defray the costs of the $6.5 million penalty.) The commissioner’s statement also serves to remove concerns about CFTC Division of Market Oversight Director Dorothy DeWitt’s role advising Coinbase as its general counsel before coming to the CFTC.
One may still be stumped, however, not just by Coinbase’s unpersuasive explanation for the sudden suspension of margin trading last year but also the extent to which the CFTC’s now- settled case affects its going public. In its S-1 filing, Coinbase’s sole identified current legal proceeding is the one that resulted in the fine. Has the company been newly tipped to other possible regulatory actions?
Agree to disagree
While she explicitly states that she concurs with the findings and the terms of the settlement order, Commissioner Stump’s statement of concurrence with the Coinbase findings presents an extensive disagreement with the CFTC’s bringing the case against Coinbase in the first place.
The agency posted no other concurrences or dissents.
Stump makes worthy, albeit general, points about setting priorities and allocating resources at the agency. She goes to great lengths to say that she worries about the public being misled by the Coinbase settlement into thinking that the commission regulates cryptocurrency trading platforms. In contrast to former Chairmen J. Christopher Giancarlo and Heath Tarbert, who actively promoted cryptocurrency innovation, Stump says it is the agency’s responsibility to “focus the expenditure of its limited human and financial resources on the derivatives markets, which is the CFTC’s primary responsibility.”
Yet it is not clear whom the commissioner is addressing with her statement. Prosecution of the case against Coinbase predates Acting Chairman Rostin Behnam’s time in office. It is late in the game to skewer earlier leaders of the commission.
As mentioned earlier, Stump says that Coinbase is free of any regulatory jurisdiction by the CFTC, even when Coinbase itself seems to have concluded otherwise or at least pretended to last November. She goes on to complain about the fact that the activities were in the past and that they stopped committing those false and manipulative acts years ago.
Not known for rocking the boat, Stump is one of the most knowledgeable, dedicated and experienced persons to ever serve on the CFTC. This case against Coinbase for activities from as early as 2015 is an odd one to highlight for taking a long time for the CFTC to conclude.
CFTC justice is often not swift. The CFTC’s case against Kraft Foods almost settled in August 2019, four years after the market manipulation case was first brought in 2015, four years after the alleged 2011 manipulative trading. Only last year did the CFTC finally drop its litigation against Jitesh Thakkar and settle with Edge Financial for manipulation alleged to have occurred in 2012 — eight years earlier.