We’re excited to announce that customers will be able to buy, sell, send and receive Bitcoin Cash on Coinbase.
Long story short, things immediately went off the rails.
Here’s the celebratory tweet:
— GDAX (@GDAX) December 20, 2017
Then this happened (note that $9,500 is just “a bit” above the price on other exchanges and by “a bit” I mean like $6,000 higher):
Finally, around 1 a.m. New York time on Wednesday, GDAX posted the following status update:
— GDAX (@GDAX) December 20, 2017
All of that came on the heels of Tuesday evening’s shenanigans in Bitcoin, which of course coincided with the Coinbase announcement:
Needless to say, that decline you see prior to the flash crash is highly suspicious. As is this chart showing the two-day run-up in bitcoin cash ahead of the same announcement:
We documented Tuesday evening’s Bitcoin flash crash here and in that post, we linked to another piece we published on Monday that offered a couple of possible explanations for the rally in bitcoin cash. One thing about those explanations was that if they were together the proximate cause, they were operating with a lag, which is something you don’t generally see in the crypto space.
Well now, Coinbase thinks maybe the recent rally in bitcoin cash and the selloff in Bitcoin that preceded the flash crash, might have been insider trading.
Here’s what Coinbase CEO Brian Armstrong said in a blog post:
Today we announced support for Bitcoin Cash (BCH). It appears the price of Bitcoin Cash on other exchanges increased in the hours before our announcement.
We’ve had a trading policy in place for some time at Coinbase. The policy prohibits employees and contractors from trading on “material non-public information”, such as when a new asset will be added to our platform. In addition to trading restrictions, it prohibits communication of material non-public information outside the company. This includes to friends and family.
Our launch of Bitcoin Cash today is no exception to this. All Coinbase employees and contractors were explicitly prohibited from trading Bitcoin Cash and from disclosing our launch plans over a month ago. This was communicated multiple times via multiple channels to employees. For instance, I made sure it was emphasized at our Friday Q&A sessions, and in emails sent to all employees. I view it as a key part of my job to set the tone from the top about how we all must act to ensure success. The trading restriction, which applies to all personal trading activity on any platform, remains in effect now.
I take the confidentiality of material non-public information very seriously as CEO. 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.
That would certainly seem to suggest that employees have known about the impending launch for weeks (at least). It seems entirely reasonable to posit that some of those employees either leaked the information, traded at arm’s length through someone else’s accounts, or both.
Of course it’s not 100% clear what an “investigation” here even entails. Sure, someone over at Coinbase might be fired, but the bottom line is that without proper (i.e. formal) regulation, there is no way to ensure that this kind of thing won’t continue to happen. Formal regulation obviously doesn’t stop people from trading on inside information and if we’ve learned anything over the past 10 years it’s that regulation doesn’t stop cartels of traders from manipulating pretty much everything. Further, regulatory capture and the government’s unwillingness to treat white collar criminals the same way they treat other criminals ensures that with the possible exception of a few scapegoats, no one will ever go to prison.
All of that said, it wouldn’t hurt to have these exchanges properly regulated because while the threat of punishment for insider trading and other white collar crimes may indeed be something of a paper tiger, it’s at least more intimidating than some ridiculous internal review like what Coinbase is proposing above.