The ties that bind? Coinbase’s listing of 0x draws scrutiny given the exchange’s connections to a VC firm promising ‘asymmetric info’
Coinbase, the digital asset exchange, has stood out among a crowded field of cryptocurrency marketplaces. It even calls itself “the most-trusted brand in the space” in its marketing materials.
That trust has translated into more than 25 million users, according to some estimates, and a potential $8 billion valuation. Still, the Coinbase token listing process has faced deep scrutiny with suspicions of conflicts of interest and rumors of insider trading. With the recent listing of the 0x’s $ZRX token on Coinbase, The Block has unearthed new information that adds weight to arguments that the cryptocurrency exchange is still in the process of shaking off its scrappy startup roots. (0x is pronounced “zero-eks” for those unfamiliar with the project and its token. Some have questioned whether the token is even necessary to support the goals of the project.)
Specifically, The Block can confirm a direct connection between the team that worked on Coinbase’s token listing framework back in 2017 and Scalar Capital, whose founders had invested in the public sale of the $ZRX token. After much speculation that it would join the exchange, $ZRX began trading on Coinbase earlier this month. Scalar Capital is led by former Coinbase employees Linda Xie and Jordan Clifford. Xie is married to the 0x project’s cofounder Will Warren. Furthermore, Maksim Stepanenko, an engineer at Coinbase, advises Scalar Capital. Stepanenko was involved in the development of Coinbase’s listing procedures along with Clifford and Xie in 2017. Xie, Clifford, and Stepanenko did not respond to requests for comment.
As an investor in 0x and the wife of the project’s cofounder Will Warren, Xie had a clear financial interest in Coinbase listing 0x, according to Charles Whitehead, a professor at Cornell Law School. Notably, cryptocurrencies pop after listing on large exchanges — and in the U.S. at least, Coinbase is the largest. Still, it is not clear whether Xie’s relationship to Coinbase, via Stepanenko, combined with her relationship to 0x, present a clear conflict, Whitehead said. Fred Ehrsam, Coinbase’s co-founder, is also an advisor to 0x.
“None of these things are ideal,” he added. “Let’s assume [Xie] had strong influence over Coinbase’s listing process,then there’s maybe a conflict.”
A direct source at Coinbase denies that Scalar Capital exerted such influence over the listing of 0x. The source also denied that Scalar Capital had access to non-public information prior to Coinbase listing the token. However, in a December 2017 pitch deck obtained by The Block, Scalar Capital repeatedly emphasized its ties to Coinbase as well as access to “asymmetric info” and “early access to projects.” In an interview with The Block, Whitehead said that even the appearance of impropriety is significant, adding that the aforementioned relationships would be atypical at a Wall Street firm.
“If I am a New York Stock Exchange employee and I want to advise Goldman Sachs, NYSE is going to have problems with that because of the appearance of a conflict,” Whitehead added.
Nick Passarelli, former chief compliance officer at Dealerweb, agreed that such a conflict would likely draw attention from regulators and management in traditional financial services.
“You probably wouldn’t be advising AQR [the hedge fund] if you worked at Nasdaq, because the legal team wouldn’t be kosher with it in the first place.”
“If I’m a FINRA or SEC member firm, I can’t do advisory work for another firm without my company knowing and approving and then publicly disclosing that information,” Passarelli said, referring to the U.S. regulators of the securities industry.
The Block could not find any such disclosure of Stepanenko advising Scalar Capital aside from his public Twitter account.
Passarelli, who was hired in July as chief compliance officer for LGO Markets, a startup crypto exchange, was one of more than half a dozen legal professionals with which The Block consulted. One attorney said he wouldn’t be surprised if regulators subpoena Coinbase and Scalar after the release of this report. Whitehead did not agree with that prognosis.
Still, in some respects these type of relationships are not unusual, according to one source, inasmuch as it stands to reason that the firm would consult with other industry experts on listing new projects.
“In traditional financial services like equities or commodities, it would be customary – in some situations required – for an exchange to consult with its members and obtain the benefit of their input and expertise before putting a new set of rules in place,” Jeffrey Bandman, the founder of Bandman Advisors, a consulting firm, said. “So the parallel here would be for Coinbase to consult with projects and market participants before instituting a new framework like their listing procedures.”
Whitehead said this specific situation is emblematic of the nascent nature of the crypto market and the exchanges facilitating the listing and trading of crypto assets. It’s a concern that the New York Attorney General’s office noted in a recent report titled Virtual Market Integrity Initiative Report.
“In order to protect themselves, customers should seek out platforms that pay careful attention to these issues and use appropriate means to ensure that all traders on the platform are being treated equally and fairly,” the report said. “At the industry level, appropriate management of conflicts of interest is critical if virtual assets are to be integrated into the commercial and financial markets.”
To be sure, Coinbase has taken significant steps to support fair and orderly markets. Coinbase does not allow employees and contractors to trade on “non-public information” out of the firm. Coinbase CEO Brian Armstrong made it clear in the aftermath of its listing of bitcoin cash that the firm would terminate employees in violation of its policies and take legal action. The price of bitcoin cash spiked on numerous exchanges hours before its listing on Coinbase, sparking rumors that employees at the firm traded on the information or shared it externally. Since then, the firm has attempted to increase transparency around listings.
“Our goal is to make Coinbase the most trusted and easiest to use digital currency exchange,” Armstrong explained in a December blog post. “We will only accomplish this goal by ensuring that we (the employees and contractors at Coinbase) all hold ourselves to a high standard of conduct.”
Reporting for Business Insider, this reporter outlined how Coinbase was building out a platform to better monitor its exchange. As part of those efforts, the company hired Peter Elkins from the New York Stock Exchange to develop the so-called Coinbase Trade Survellience Program. Coinbase hopes the program will allow it to detect suspicious trading activity.
Disclosure: Through its subsidiary Coinbase Ventures, Coinbase has made a small investment in The Block.
The post The ties that bind? Coinbase’s listing of 0x draws scrutiny given the exchange’s connections to a VC firm promising ‘asymmetric info’ appeared first on The Block.
The ties that bind? Coinbase’s listing of 0x draws scrutiny given the exchange’s connections to a VC firm promising ‘asymmetric info’ written by Frank Chaparro @ https://theblockcrypto.com/2018/10/22/the-ties-that-bind-coinbases-listing-of-0x-draws-scrutiny-given-the-exchanges-connections-to-a-vc-firm-promising-asymmetric-info/ October 23, 2018 Frank Chaparro