Crypto.com's Trading Practices Raise Concerns About Potential Conflicts

Crypto.com’s Trading Practices Raise Concerns About Potential Conflicts

Updated: 28 June 2023

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Internally operated trading teams with a profit-driven focus at Crypto.com, the digital asset exchange promoted by renowned actor Matt Damon, have sparked questions about potential conflict of interest within the industry of digital assets. This development further highlights the complexities present within this expanding sector.

Crypto.com, which stands amongst the top ten global cryptocurrency marketplaces and is headquartered in Singapore, runs proprietary trading and market-making teams, as verified by five individuals possessing first-hand knowledge. Such activities typically occur via separate private firms, and not directly within exchanges which are primarily platforms connecting buyers and sellers at the most equitable transparent price.

Changpeng Zhao, the CEO of Binance, the largest crypto exchange in the world, was recently charged by the US Securities and Exchange Commission (SEC) for using a trading firm under his control to artificially augment the platform’s trading volume through “manipulative trading.” This enforcement action was part of a larger crackdown on comparable activities across other digital asset exchanges by US regulators.

Gary Gensler, the chair of the SEC, commented on the situation to CNBC on June 6. He pointed out that these platforms, which present themselves as exchanges, are amalgamating various functions. He added that traditional financial institutions, such as the New York Stock Exchange, do not operate a hedge fund or undertake market-making while functioning as an exchange.

Since its inception in 2016, the internal trading activities within Crypto.com have largely remained under wraps. An individual with detailed knowledge regarding the situation revealed that executives from Crypto.com had assured other trading firms, through vehemently declared assertions, that the company had no involvement in trading activities. Another person shared that the company had instructed its employees to deny any existence of internal market-making operations.

Allegations Denied

In response to inquiries from the Financial Times, Crypto.com negated the allegation that employees were directed to provide false information to other market participants. The company clarified that their internal market maker operates on the Crypto.com exchange and is treated with parity, just like third-party market makers who promote efficient markets and tight spreads on their platform.

The company stressed that this is not a controversial practice and shared that their primary revenue stream is from their retail trader-focused app, where Crypto.com acts as a broker and a counterparty to transactions. The trading team at Crypto.com works to maintain risk neutrality by hedging these positions across various venues, including their own exchange.

The exchange is open for institutional traders and is maintained as a level playing field trading venue. The proprietary trading team, whose primary aim is profit generation and not exchange facilitation, trades on Crypto.com’s exchange and other venues, according to informed sources. The company’s market-making desk aims to enhance liquidity on the platform.

Crypto.com noted that trading industry operators often compare volumes to competitors. The company’s key goal is to consistently enhance order book liquidity and decrease spreads, creating a more efficient market for all participants. They stated that all platform participants, including market makers, are treated equally, and proprietary trading isn’t a revenue source for them.

Crypto.Com: A Well-Known Brand

Crypto.com, co-founded by current CEO Kris Marszalek and CFO Rafael Melo amongst others, has reportedly traded $35bn in spot crypto and $21bn in crypto derivatives in the current year, as per CCData. The company’s visibility has greatly increased due to various high-profile sponsorships and sporting deals. For instance, they hired Oscar winner Matt Damon for a Super Bowl promotion and their logo has been showcased at the Qatar World Cup and Formula One racing circuits. They also hold a multi-year partnership with basketball superstar LeBron James and a 20-year naming rights agreement for a major sports arena in Los Angeles.

Post the SEC enforcement action, Crypto.com stated that it will be closing its exchange for US institutional traders from June 21 due to limited demand “in the current market landscape”. The private company, which files accounts in various jurisdictions including Malta, does not publicly provide a revenue breakdown by business line.