Coinbase CEO Brian Armstrong
Coinbase CEO Brian Armstrong. Anthony Harvey/Getty

Bitcoin users took to social media on Wednesday to accuse Coinbase employees of insider trading before the exchange launched new support services for bitcoin cash (BCH), a rising altcoin created through a controversial bitcoin network fork last summer. Several cryptocurrency platforms, including Kraken and GDAX, provided public pricing data as BCH surged on popular exchanges with wildly oscillating prices. TechCrunch reported the price of BCH hit an $8,500 peak on Coinbase, almost three times higher than the price listed on all other exchanges.

Bitcoin aficionados subsequently tweeted accusations that Coinbase employees engaged in insider trading, allegedly buying BCH from other exchanges when they knew the cryptocurrency would soon come to Coinbase and boost global trading volume.

Coinbase CEO Brian Armstrong immediately responded with a blog post, saying: “It appears the price of Bitcoin Cash on other exchanges increased in the hours before our announcement... 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.”

BCH prices continue to fluctuate dramatically in the aftermath of this controversy. According to CoinMarketCap, BCH rose from $3,250 to around $4,300 by Wednesday morning. However, this scandal is impacting the blockchain industry well beyond BCH itself. This week CME Group also launched highly anticipated bitcoin futures contracts with potential for cash settlements.

Coinbase is one of the cryptocurrency companies contributing to the CME price index and product launch. CNBC reported CME bitcoin futures settled lower than comparable Cboe bitcoin futures, which launched last week. CME member and bitcoin veteran William Mallers believes the Coinbase controversy may have contributed to CME contracts’ underwhelming debut.

“If we have somebody that can’t really snooze without their employees frontrunning their own customers contributing to our cash settlement index, that’s a confidence killer in my mind,” Mallers told International Business Times. “They [Coinbase] are launching a product that claims to be the real bitcoin [BCH] and that creates a conflict of interest...that’s the reason we [CME] have an oversight committee.”

Armstrong’s internal probe has yet to prove whether Coinbase employees engaged in activities that could legally classify as insider trading. Regardless, Mallers said bitcoin futures have proven to be one of the most complex and difficult products the Chicago-based institution has launched. The bitcoin community is widely skeptical of traditional finance protocols like cash settlements, and vice versa for old school financial incumbents. To make matters worse, many people saw Coinbase’s surprising move to open up BCH trading the same week, without public preamble, as an endorsement of BCH. “That’s the kind of confidence crushing that is really going to hurt the contracts going forward,” Mallers said.

These accusations also raise new questions about what constitutes insider trading in an emerging market like cryptocurrency. Tokens generally surge when they are added to popular exchange platforms. Insider knowledge of trading volume and upcoming announcements could give exchange employees an unfair advantage in their after hours trading. Several former Coinbase employees have also gone on to start their own crypto hedge funds and investment startups.

Similar rumors spread about exchanges such as Poloniex when several niche tokens experienced massive selloffs before the exchange delisted them. “I’m not even sure what would count as insider trading in a company like that,” Mallers said of exchange startups. “If employees had knowledge of this [type of] release, that is bad because you are racing your customers.”

These Coinbase accusations aren't unique. In previous years, employees at the infamous Mt.Gox exchange were also accused of insider trading and price manipulation. The cryptocurrency industry still lacks the type of regulatory oversight and protections that safeguard other financial markets. Only time will tell if controversies like this will inspire the cryptocurrency industry to self-regulate with stricter internal policies or if external regulators will eventually step in.