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Coinbase Tested Group to Speculate on Crypto

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Coinbase Global Inc. has been searching for new ways to make money. One business it flirted with was controversial: using its own money to speculate on cryptocurrencies.

Last year, Coinbase—which operates a large cryptocurrency exchange that handles bitcoin and other digital coins—hired at least four senior Wall Street traders and launched a group to generate profit, in part, by using the company’s cash to trade and “stake,” or lock up, cryptocurrencies, according to people close to the matter. The activity was described as “proprietary” trading by the people at the company.

Earlier this year, the team completed a $100 million transaction that the group viewed as a test trade of the new effort, according to the people. The transaction came after Coinbase executives testified to members of Congress last year that the company didn’t buy and sell digital currencies for its own account.

The monthslong effort to launch the Coinbase Risk Solutions group underscores how Coinbase, which has seen its shares tumble about 70% over the past year, has entertained more aggressive strategies as it tries to develop new businesses.

Coinbase says some at the company examined pursuing proprietary trading but decided against it.

“Our statements to Congress accurately reflect our actual business activities,” a Coinbase spokeswoman said. “Coinbase does not, and has never, had a proprietary trading business. Any insinuation that we misled Congress is a willful misrepresentation of the facts.” 

Coinbase went public with a highly anticipated listing in 2021, but as the crypto market crashed, the company’s share price dropped by more than 80%. Now it’s working to diversify its revenue. WSJ’s Paul Vigna explains what went wrong. Illustration: Jacob Reynolds

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

There are no regulations preventing firms like Coinbase from trading digital currencies alongside their clients.

In the past, investment banks operated proprietary trading groups that were active in stock and bond markets, while also doing “agency” trading, or trading solely on behalf of customers.

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

In July of last year, Coinbase established the Risk Solutions unit to trade crypto for clients. The group also made plans to begin making trades with Coinbase’s cash, among other strategies, according to the people close to the matter.

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

Coinbase Chief Financial Officer Alesia Haas, seen at a House committee hearing in December, helped create the Coinbase Risk Solutions unit.



Photo:

PHOTO: Rod Lamkey/Zuma Press

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

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

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

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Later, the company clarified its activities to Rep.

Maxine Waters

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

Earlier this year, after the testimony before Congress, Coinbase’s Risk Solutions group completed its first, sizable transaction. It raised money for the transaction by guaranteeing a $100 million “structured note” that was sold to firm

Invesco Ltd.

at a fixed-rate of 4.01%, according to people close to the matter. Coinbase used the $100 million to profit in cryptocurrency markets, according to the people.

An Invesco spokeswoman confirmed the transaction and said the investment firm had “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, the people said, and Mr. Tejpaul praised the executives who worked on the transaction in internal communications and expressed eagerness to make additional such transactions, the people said. 

The trade occurred after the crypto market started to fall from its all-time high, eating into Coinbase’s business.

Coinbase 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 business have left the company, the people said.

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

“They don’t want the public to perceive them as taking unnecessary risk…retail investors are concerned about the stability of a trading platform,” says

Mark Palmer,

an analyst at BTIG. “But it’s crucially important that the company diversify because they remain overly dependent on transactions from retail customers.”

The company is expanding 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 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 decisions.

WSJ’s Dion Rabouin explains why many investors are still betting on crypto, even with the very real threat of losing all their money. Illustration: Rami Abukalam

Write to Gregory Zuckerman at [email protected]

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