Coinbase Global Inc. has been looking for new ways to make money. One business it flirted with was controversial: on with its own money cryptocurrencies to speculate.
Last year, Coinbase — which operates a major cryptocurrency exchange — introduced the Bitcoin and other digital coins handles — hired at least four top Wall Street traders and formed a group to generate profits, in part by using the company’s cash to trade and “stake.” or block, cryptocurrencies, according to people close to the matter. The activity has been described as “proprietary trading” by company employees.
The months-long effort to create the Coinbase Risk Solutions group underscores how Coinbase, whose shares have fallen about 70% over the past year, is pursuing more aggressive strategies to develop new businesses.
According to Coinbase, some employees at the company have attempted proprietary trading but decided against it.
“Our statements to Congress accurately reflect our actual business activities,” a Coinbase spokeswoman said. “Coinbase never had and never had a trading business of its own. Any suggestion that we misled Congress is a willful misrepresentation of the facts.”
That added the Coinbase spokeswoman “Coinbase Risk Solutions was formed to facilitate client-driven crypto transactions,” and “tools and policies to mitigate conflicts of interest” were in place within the group.
There are no regulations preventing companies like Coinbase from trading digital currencies with their customers.
Historically, investment banks operated proprietary trading groups that traded in the stock and bond markets, while also engaging in “agency” trading or trading solely on behalf of clients.
Bank rules restricting speculative trading, introduced in 2010, were eased somewhat a few years ago, and Coinbase has never been subject to those restrictions. Still, regulators and politicians have long feared speculative activity by firms like Coinbase in emerging crypto markets could hurt customers. When a financial firm invests money for its clients while also investing its own money in the market, it can create risk and potential conflicts of interest with clients. For example, a company buying or selling the same assets could drive the price of those assets up or down, causing harm to customers.
In July of last year, Coinbase launched its Risk Solutions unit to trade crypto for clients. The group also planned to trade Coinbase’s money, among other strategies, according to people familiar with the matter.
The team built sophisticated trading systems to enable this trade, people say. Alesia Haas, Coinbase’s chief financial officer, helped found the entity, which was led by Brett Tejpaul, Coinbase’s head of institutional sales, trading, custody and prime services, the people said. Employees have been discouraged from sharing information about the new trading deal or discussing it in internal communications, the people said.
Neither Ms. Haas nor Mr. Tejpaul responded to a request for comment.
In December, five months after founding the Coinbase Risk Solutions entity, Ms. Haas testified before Congress that “Coinbase is an agency-only platform. We do not engage in proprietary trading on our platform.”
When asked by Rep. Alexandria Ocasio-Cortez (D, NY), Ms. Haas reiterated that Coinbase does not engage in proprietary trading.
The company later explained its activities to Rep. Maxine Waters (D., California), saying that “Coinbase from time to time purchases cryptocurrencies as principals for specific purposes that we do not consider proprietary trading due to their purpose not for Coinbase, to benefit from increases in the value of the traded cryptocurrency.”
Earlier this year, according to testimony before Congress, Coinbase’s Risk Solutions group completed its first major transaction. It raised money for the transaction by guaranteeing a $100 million “structured note” that was sold to firm Invesco GmbH.
at a fixed rate of 4.01%, according to people close to the matter. Coinbase used the $100 million to profit from the cryptocurrency markets, people said.
A spokeswoman for Invesco confirmed the transaction, saying the investment firm has “no direct exposure to cryptocurrency” as part of the debt deal, adding that “this is no longer an active position for us.”
The deal was profitable for Coinbase, people said, and Mr. Tejpaul praised the executives who worked on the transaction in internal communications and expressed eagerness to complete more such transactions, people said.
The trade took place after the crypto market from its all-time high began to fall and hurt Coinbase’s business.
Coinbase then bogged down with the idea of doing proprietary trading. In recent months, a number of senior traders hired to help run the business have left the company, the people said.
Analysts say Coinbase executives are trying to balance the need to maintain the company’s reputation for security while also diversifying its existing business and finding new areas for growth. Coinbase derives almost all of its revenue from trading with individual investors — and it lost $1.1 billion in the second quarter due to the crypto market crash.
“They don’t want the public to perceive them as unnecessary risks… Retail investors are concerned about the stability of a trading platform,” says Mark Palmer, an analyst at BTIG. “But it’s vital that the business diversifies as it continues to remain overly dependent on retail transactions.”
The company is growing its business in other ways. Earlier this month, BlackRock,
the world’s largest money manager, announced a partnership with Coinbase. BlackRock’s institutional clients who also own digital assets on Coinbase can now use Aladdin, the wealth manager’s suite of software tools, to manage their portfolios and perform risk analysis on investment decisions.
Authors: Gregory Zuckerman at Gregory.Zuckerman@wsj.com
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Source: Crypto News Deutsch