On September 18th, the New York Attorney General’s office released a scathing report on crypto exchanges. Three (Binance, Gate.io and Kraken) were referred for prosecution, and the largest crypto exchange – Coinbase – was described as maintaining a “proprietary trading” operation that faced Coinbase clients and accounted for 20% of total trade volume on the exchange. On September 19th, Coinbase posted a blog report stating that the NY AG’s report was untrue, and that Coinbase “does not operate a proprietary trading desk, nor does it undertake market making actions.”

So who’s telling the truth? Is Coinbase running a prop desk or not?

My belief – and to be clear I do not have a dog in this fight, and I am happy to be disabused of these opinions if I’m working from incomplete or erroneous information – is this: Coinbase is telling the truth. They do not run a prop desk.

It’s worse than a prop desk.                                                                          

At least a prop desk takes risk. The Coinbase proprietary trading operation (yes, the NY AG is telling the truth, too) that faces their retail client base through “Coinbase Consumer” takes ZERO risk when it pockets a spread between their worse-than-market offer to retail clients and their on-market bid to professional clients. They are a middleman (while carefully avoiding the legal designation of “market maker”) that executes a trade with retail clients for $x per Bitcoin and then immediately offloads that risk with professional clients at a trade for $y per Bitcoin, pocketing the essentially risk-free profit between $x and $y.

AND they charge a commission on the trade.

Again, if I’m working from bad information here (1% per trade in commission fees, $30-40 spread over past few months of BTC price at $6,000-8,000, commensurately higher spread when BTC price was higher), then by all means set me straight and I’ll be happy to restate my conclusions here. I really mean that. Barring that …