Tim Fries
In a recently published blog post, Coinbase’s CEO Brian Armstrong addressed concerns related to token listings on the centralized exchange. The largest US crypto exchange is aiming to improve token listing procedures, to ensure there is no unfair advantage to be exploited… anymore.
Coinbase Will Work on Keeping Token Listings Silent On-Chain
Specifically, removing the ability to analyze on-chain data as a way to guesstimate which tokens are on schedule to be released:
- Using on-chain data to tell which new assets are being tested for Coinbase integration.
- Using Coinbase API (Application Programming Interface) software to tell when a new asset might be configured and tested for release.
Coinbase emphasized that, although this data is publicly available, only the more enthusiastic and advanced users would be tapping into it. Therefore, Coinbase is now in the process of shutting down technical loopholes when listing new tokens.
“We won’t catch everything, but these investments will help us get better, and we may be able to open source these approaches and standards to the industry over time so we can all learn from them together.”
Brian Armstrong, CEO of Coinbase
How Will Coinbase Close Off the Listing Loopholes?
Like other centralized exchanges (CEXes), Coinbase acts as a third party, providing market liquidity and an interface to connect users to blockchain assets. Therefore, when users interact with Coinbase, they connect to a marketplace. In turn, Coinbase connects to various blockchain networks as an intermediary.
While doing so, Coinbase leaves footprints on public blockchains—on-chain data—revealing the state of all transactions added to blockchains as new blocks. By the same unlisted token, when a new one is being tested, it also gives out on-chain signals. For this reason, Coinbase plans to:
- Publish the listing externally before the technical token integration process starts.
- Publish the listing only when it is certain the token will be listed, as opposed to when just considered.
- Label newly listed or unproved tokens, so only advanced traders would be willing to engage in their trading. This is a continuation of the experimental labeling feature launched in March, aimed at reducing the risk with assets that have high volatility, low liquidity, or high order cancellations.
- Create a user-based ratings/review system for tokens so that traders make more informed decisions. With an emphasis on eliminating fake accounts and Sybil attacks (flooding a reputational system with pseudonymous identities), this new feature should be rolled out by the end of 2022.
Lastly, Coinbase will take advantage of its own analytics and forensic tools to assess the tokenomics of a project as a part of valuation before listing it. Lastly, Armstrong claims that the company goes beyond the required to intercept insider trading.
“We mandate that all employees trade crypto only on Coinbase’s trading platforms (where the asset is supported) so we can look out for prohibited trading activities. And we have a dedicated Trade Surveillance team that utilizes advanced software to investigate and stay ahead of possible abuse.”
Brian Armstrong, CEO of Coinbase
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A Repeat of the Insider Trading Problem for Coinbase
Those who have been paying a little bit of attention to the crypto space have certainly noticed one key ingredient to crypto trading. Just like with NFTs, when a token is listed on a major exchange, its price goes drastically up, only to rapidly deflate.
In fact, just a rumor of a token listing is often enough to generate pump and dump schemes, depending on how legitimate the social media source appears to be. These schemes are also called “buy the rumor, sell the news”, traditionally present in the stock market.
The recipe is always the same:
- Buy a barely known asset at a discount.
- Portray that asset as heading for major appreciation, usually in an organized manner on social media platforms.
- Sell the asset for massive gains when other traders pump its price.
- The rest of the traders are then left “holding the bag”.
In the crypto space, the listing alone on a major exchange tends to be more important than the project’s fundamentals. Of course, this creates a massive incentive for crypto exchanges’ employees as well. Cryptocurrency influencer Jordan Fish (@Cobie) recently documented such suspicious moves.
A month prior, just before Pawtocol (UPI) and Aventus (AVT) tokens were announced to be listed, someone made a new wallet to go on a shopping spree.
Whether these auspicious transactions are done by very advanced users or insiders, it appears the incentive structure is shaping CEXes into traditional stock market institutions. The unrelenting inflation of altcoins is particularly profitable. In Q4 2021, Coinbase made 68% of trading volume from altcoins, having listed 95 new ones last year.
In the traditional market, insider trading fines are commonly viewed as a cost of doing business. More often than not, they pass under the radar, as exemplified by the exceedingly shady Eastman Kodak pump and dump scheme.
In the case of Coinbase, the crypto exchange was hit with a class-action lawsuit in March 2018, related to the Bitcoin Cash listing. However, the court granted a motion to dismiss it without prejudice in October.
“A reader of the Complaint is thus left wondering what Coinbase should have done differently, or why the rollout of Bitcoin Cash would have gone more smoothly had Coinbase done whatever Berk thinks is appropriate.”
Rather than focusing on making sure un-hosted wallets are effectively banned, perhaps the regulative focus should be on ensuring CEXes don’t take advantage of their growing power to legitimize assets.
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About the author
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.
