According to Fortune, Coinbase is closing an investigation into whether Coinbase employees participated in insider trading. Coinbase concluded that, while Bitcoin Cash did experience a notable increase in value just before the exchange announced its support for BCH, there was no apparent wrongdoing from Coinbase employees. A class-action lawsuit from Coinbase customers, however, remains ongoing.
The Coinbase-Bitcoin Cash controversy is therefore only partially closed.
Coinbase Launches an Investigation Into Insider Trading
Bitcoin Cash experienced a significant increase in value just before Coinbase announced that they would add the digital currency to their cryptocurrency exchange. While token prices tend to increase when a large exchange announces the support of the token, the price increase preceded Coinbase’s announcement. The investigation was therefore focused on issues concerning Coinbase employees acting on insider knowledge. Many Coinbase users accused Coinbase employees of purchasing large amounts of Bitcoin Cash hours before the announcement.
Coinbase responded to an inquiry from Fortune, stating that they finished investigating the alleged insider trader situation last week after months of inspection from two national law firms.
“We would not hesitate to terminate an employee or contractor and/or take appropriate legal action if evidence showed our policies were violated,” said a company spokesperson. “We can report that the voluntary, independent internal investigation has come to a close, and we have determined to take no disciplinary action.”
Price of Bitcoin Cash Skyrockets Before Coinbase Announcement
Bitcoin Cash emerged in August 2017, when a group of developers created a fork from Bitcoin. While Coinbase was originally not going to support Bitcoin Cash, they soon told their customers that they would distribute the token by January 2018. Coinbase, however, began distributing the Bitcoin Cash token on December 19, 2017, after an announcement via Twitter.
Coinbase’s decision to support the token had a big impact on the value of Bitcoin Cash. Since Coinbase is one of the largest cryptocurrency exchange’s in the world, providing greater accessibility to another cryptocurrency token was very positive news for Bitcoin Cash. However, just a few hours before Coinbase’s unexpected announcement, Bitcoin Cash’s value increased significantly. In a few minutes, the value of Bitcoin Cash increased by almost $1,000.
According to Motherboard, Jeffrey Berk, an angry Coinbase customer, mentioned that those who weren’t aware of Coinbase’s decision “got screwed over by those who were privy to that info ahead of the announcement.” Berk is a cryptocurrency trader who has filed a class action lawsuit against Coinbase. A Coinbase spokesperson told Motherboard that the company is aware of the lawsuit and is currently looking over the situation.
Berk believes that Coinbase employees—or others with inside information—flooded GDAX, a Coinbase-owned cryptocurrency exchange, with many buy-and-sell orders after Coinbase announced their support of Bitcoin Cash. A few minutes after Coinbase began trading Bitcoin Cash, the cryptocurrency exchange experienced liquidity issues and began to cancel any more orders. Coinbase users could not purchase Bitcoin Cash until the following day when the price had increased significantly.
“When Coinbase’s customers’ trades were finally executed, it was only after the insiders had driven up the price of Bitcoin Cash, and thus the remaining bitcoin customers only received their Bitcoin Cash at artificially inflated prices that had been manipulated well beyond the fair market value of Bitcoin Cash at that time,” said Berk’s lawsuit.
Coinbase CEO Brian Armstrong Publishes a Post to Clarify the Situation
Brian Armstrong, Coinbase’s CEO, responded to the situation strongly with a blog post in December outlining Coinbase’s employee trading policies. Armstrong shared with Coinbase customers the company’s internal trading and confidentiality policies just a day after the Bitcoin Cash announcement.
“I take the confidentiality of material non-public information very seriously as CEO,” said Armstrong. “Given the price increase in the hours leading up the announcement, we will be conducting an investigation into this matter. If we find evidence of any employee or contractor violating our policies – directly or indirectly – I will not hesitate to terminate the employee immediately and take appropriate legal action.”
Fortune noted that, while two national law companies found no wrongdoings from Coinbase employees, the company still faces the class action lawsuit that demands compensation for Coinbase’s negligence and violation of consumer protection laws. The case is currently in procedural stages. Lynda Grant, a lawyer representing the plaintiffs in the class action suit also believes that the Commodity Futures Trading Commission (CFTC) is investigating Coinbase over the Bitcoin Cash trading incident as well. She, however, did not provide any further information.
The ‘Coinbase Effect’
According to a blog post by Ari Paul, the co-founder and CIO of BlockTower Capital, Bitcoin Cash’s increase in price may simply be the result of ‘Coinbase Effect.’ The Coinbase Effect occurs when a digital token experiences a surge in price as a result of being listed on a major cryptocurrency exchange.
Paul mentioned that when Coinbase added Litecoin to their cryptocurrency exchange, the price jumped about 30 percent. Paul argued that these increases in prices are very sound. “There is a very heavy accessibility premium in cryptocurrency valuations,” said Paul. “As a cryptocurrency becomes easier to purchase and easier to store, it’s valuation should rise…and it clearly does.”
Fortune noted that a recent example with Coinbase was the increase in price for Ethereum Classic. When Coinbase announced its support for the token, Ethereum Classic’s price increased significantly after the announcement.
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