By The Coinbase Trade Surveillance Team
One of the most pervasive misconceptions of crypto is that it’s an unregulated space, rife with market manipulation, insider trading and bad actors. The reality is that this is far from the truth. Crypto is in fact highly regulated, and good actors in the space take pride in working with regulators around the world to ensure the safety and security of their customers and their funds.
Coinbase is overseen by more than 50 regulators in the U.S. alone. Globally, that number rises even higher. Our goal is to be the most trusted venue for anyone in the world to interact with the cryptoeconomy. Core to this commitment to earning our customers’ trust is to hold ourselves to not only the highest levels of regulatory compliance, but also operational excellence when it comes to internal controls and employee behavior.
Since Coinbase’s inception in 2012, we’ve leaned into compliance. This includes a range of internal controls around data protection, ongoing training sessions, and well-documented policies. Of these policies, one of the most important is our insider trading policy. This document defines how, when and what assets Coinbase employees, consultants, contractors and board directors can trade, with the intent of ensuring that these groups can’t trade while in the possession of material non-public information (MNPI).
Like all publicly traded companies, Coinbase restricts when employees and other insiders can buy or sell company stock. For instance, employees and company insiders are only allowed to trade during very brief trading windows, directly following our public earnings calls, when they don’t possess MNPI, or through pre-approved and pre-scheduled 10b5–1 plans.
Similarly, when it comes to crypto, our insider trading policies are designed so that no one associated with the company can trade crypto assets (including NFTs) with information that isn’t public. This includes knowledge that an asset is likely to be added or removed from our trading platforms, that we will be offering new features or services based on an asset (this could include things like staking or a product integration), or other information that could impact (positively or negatively) the price of an asset. To ensure that employees and others that fall under the purview of this policy are aware of the assets they can and cannot trade at a given time, we have a regularly updated list of restricted digital assets. Additionally, employees that have broad insight across the company (senior executives, some members of our legal, compliance and communications teams, for example), are party to an “enhanced” insider trading policy that includes supplemental oversight such as quarterly attestations, pre-disclosure of trades made off Coinbase’s trading platforms, as well as additional monitoring.
As an additional layer of enforcement, Coinbase also mandates that all employees and board directors trade crypto only on Coinbase’s trading platforms (unless the asset they wish to trade is not supported by Coinbase in their region). This additional step is important for two reasons: First, it means we can proactively disable trading on certain assets, at certain times, for certain employees. Second, it also means that we have full visibility into our employees’ and board directors’ trading behavior — which is an important distinction from traditional exchanges and spot markets which tend to encourage employees to trade on platforms other than the one that they work for.
On top of the restrictions noted above, Coinbase prohibits the use of trading algorithms by employees on all Coinbase platforms.
Mandating that employees trade exclusively on Coinbase platforms also enables our Trade Surveillance team to monitor for prohibited trading activities — such as market manipulation. Market manipulation can take many forms, but is broadly defined as actions taken by any market participant or a person acting in concert with a participant which are intended to:
- Deceive or mislead other Traders;
- Artificially control or manipulate the price or trading volume of an Asset; or
- Aid, abet, enable, finance, support, or endorse either of the above. This may include actions on Coinbase Pro/Exchange and/or outside of Coinbase Pro/Exchange.
Much like traditional financial markets, specific forms of market manipulation that Coinbase prohibits include:
- Wash trading: a form of market manipulation in which an investor simultaneously sells and buys the same financial instruments to create misleading, artificial activity in the marketplace.
- Trade spoofing: a practice of placing fake or non-bonafide bids and offers in an attempt to push the market in a particular direction to execute bonafide contra-side orders. The non-bonafide orders are then cancelled.
- Trade layering: Similar to spoofing, layering is the practice of placing non-bonafide orders to influence or push the market in a direction to have real orders executed. The key difference being that instead of placing one large fake or non-bonafide order at the top of the order book (spoofing), multiple orders at different price points are entered. Similar to spoofing, once the real or bonafide order is executed, the fake orders are cancelled.
- Front-running: the act of executing a trade (either a buy or a sell) when you have knowledge that a trade or group of trades will shortly follow thereafter.
- Trade churning: the practice of executing trades for an investment account by a trader or broker in order to generate commission from the account.
- Quote stuffing: a form of market manipulation employed by API or algorithmic traders that involves quickly entering and withdrawing a large number of orders in an attempt to flood the market.
Trade monitoring and surveillance
Coinbase takes trade monitoring and surveillance very seriously. Our Trade Surveillance team draws on a range of experience that includes former regulators, compliance at multinational, Bulge-Bracket banks and broker-dealers, technology companies and crypto specialists.
People + technology
Underpinning our Trade Surveillance team is a cutting-edge surveillance technology named Eventus. The platform leverages artificial intelligence and machine learning techniques to provide 24/7/365 monitoring across all of Coinbase’s trading platforms in a way that manual tracking alone cannot. Unlike traditional market surveillance, which is often done forensically after the fact, the Eventus platform provides our Trade Surveillance team with real-time insights that can be actioned quickly, and often mitigated rapidly.
Coinbase’s goal is to provide our customers with the most trusted, safest and most secure venue with which to access the cryptoeconomy. Compliance, market integrity and surveillance are core components of this approach and we’re proud of what we’ve built. As with anything, we’ll continue to enhance our systems over time and look forward to sharing these updates as they happen.
How Coinbase thinks about market integrity and trade surveillance was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.