LEGAL TROUBLE FOR COINBASE SPELLS THE YEAR OF THE DEX
By Jenny Vatrenko
Coinbase – the most popular fiat to cryptocurrency exchange with more customers than Charles Schwab – was recently hit with two class-action lawsuits in two days, accusing Coinbase employees of insider trading, among other things.
The insider trading allegations have been well known in the crypto community since Coinbase’s launch of Bitcoin Cash (BCH). Although Coinbase publicly announced that it would support BCH at some point, the company did not reveal exactly when BCH would be available for trading. The Coinbase employees, however, knew for over a month about the BCH listing date before it actually happened on December 19, 2017. According to Jeffrey Berk’s complaint, the employees bought BCH and tipped off others about the listing date, causing the price to spike just as the cryptocurrency became available on Coinbase. Back in December, Coinbase acknowledged the price run-up and insider-trading rumors and launched an internal investigation, but never revealed its results.
To date, many in the crypto community have shrugged off Coinbase employees’ actions as “perks” of working at large centralized exchanges like Coinbase because cryptocurrency trading is not expressly regulated by the federal government. The common wisdom seems to be that insider trading in crypto is not illegal because stock trading rules do not apply. Working around the lack of federal regulations, Berk does not allege violations of securities laws. Instead, he argues that Coinbase, by allowing its employees to trade on inside information about the listing of BCH, violated California’s Unfair Competition Law and was negligent in performing its common law duty of care to its customers. Other allegations include negligence in failing to provide proper technical support and the resulting platform overload at the time of the BCH launch and misrepresentations to Coinbase’s customers regarding its launch of BCH.
Whether the lawsuit is successful and helps combat insider trading in the unregulated crypto markets remains to be seen. What it has done presently is shine more light on the systemic issues plaguing large centralized exchanges, like Coinbase, where the exchanges become custodians of their customers’ funds and handle order books. Security breaches are yet another major concern – and Mt. Gox its tragic posterchild – with hackers recently stealing as much as $70 million from NiceHash, a crypto mining marketplace, and causing a Korean bitcoin exchange Youbit to file for bankruptcy after cyber-thieves raided a fifth of its clients’ holdings.
Insider trading, security breaches, network failures – all seem at odds with blockchain’s bold promise of trustless, secure crypto economy. The most obvious ways to protect users and investors may be by regulating and prosecuting undesirable conduct, but let’s not forget about letting the market regulate itself. In the world of cryptocurrency exchanges, the exposure of weaknesses in the centralized exchange model is ushering in a new generation of exchanges that aim to leverage the blockchain technology to solve those problems. In the past year, we have witnessed a rapid proliferation of decentralized exchanges and protocols, like 0x, AirSwap, and Kyber, among others, which enable users to retain complete control of their funds while trading, avoid security breaches, eliminate fees, and avoid slow times for depositing and withdrawing assets, among other things.
While centralized exchanges are essential to the ecosystem, enabling payments with fiat currencies, the trend towards decentralized exchanges (DEX) is evident. Is the widespread DEX adoption going to happen any time soon? Possibly. The exposure of serious disadvantages of centralized exchanges will likely accelerate the adoption of DEX, including by institutional investors, and they will continue to grow in 2018 and potentially become an essential pillar of the blockchain ecosystem.