Coinbase allocates $100 million to test prop trading

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September 26, 2022

Due to the prolonged crypto winter, many crypto companies face a difficult financial situation. As a result, they are looking for additional income opportunities to stay afloat. For example, Coinbase allocated $100 million to test prop trading, which caused great concern for users and experts because such aggressive actions can lead to significant risks for existing customers.

What do we know?

Proprietary trading is the principle of operation of a financial company when the central part of its activity is trading in shares, currencies, commodity futures, and bonds. It differs from other types of trading in that, in this case, it is carried out exclusively with the firm’s funds, not clients’ money.

In 2021, the company created a division focused on trading and staking, which was supposed to use the platform’s funds for trading.

According to the Wall Street Journal, CFO Alesia Haas oversaw the creation of Coinbase Risk Solutions and was led by Brett Tapol, head of institutional sales and trading. It is also reported that some well-known Wall Street brokers who soon left the company were involved in this work.

The creation of such a division was associated with the desire to diversify sources of income. According to experts, such a decision may be dictated by a decrease in the exchange’s capitalization, so the leaders were forced to consider options for more aggressive actions.

According to the publication, employees were prohibited from disclosing and discussing such activities in the company’s general chat rooms to prevent information leakage. Note that such actions may adversely affect the reputation of the company.

As a test transaction, the crypto exchange allocated $100 million. To raise this amount, the company sold a structured note to Invesco with a coupon rate of 4.01%. The owners of the exchange deny this deal. They say that such a solution was considered, but the top manager abandoned this idea at the last moment because of too high risks. However, an Invesco spokesperson confirmed the deal and stated that the investment firm “has no direct connection to cryptocurrencies.”

It is worth saying that earlier representatives of Coinbase Risk Solutions testified before Congress and assured that trading is carried out only using clients’ financial assets. The personal assets of the company are not used for trading. The proposed deal was executed after the evidence was in Congress.

It is worth saying that formally proprietary trading is not prohibited by law and such transactions are entirely legal. However, government authorities are concerned that using a company’s assets may lead to additional client risks and a conflict of interest. So, the heads of such companies can sell their holdings on more favorable terms than clients’ assets.

It is worth saying that the crypto exchange is now highly dependent on private clients. So, suppose they suspect they are being offered conditions worse than they could beat. In that case, this will lead to the withdrawal of money, so the company carefully hides transactions on proprietary trading.

Recall that due to the onset of the crypto-winter, the value of the Coinbase token fell by 70%, which caused great harm to the company as a whole. In addition, statistics show that in the first quarter of 2022, the company lost $1.1 billion due to the depreciation of bitcoin and other cryptocurrencies, which is much more than experts predicted.

Recall that in August, S&P Global downgraded the stock exchange’s corporate rating from ‘BB+’ to ‘BB,’ maintaining a ‘negative’ outlook. Shortly, company leaders must take action to stabilize the situation. Otherwise, the crypto exchange may become bankrupt.

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