Coinbase Custody Picks A Dubious Partner

San Franciscan Coinbase, a digital exchange with a reputation of being a sleek and savvy platform so far, has taken a step down in choosing a new fintech partner. Coinbase recently took on a strategic custodial partner in Electronic Transaction Clearing (ETC) as the exchange aims to have at least 100 big institutional clients on the books by end 2018.

Observers have raised alarm over the fact that Coinbase’s preferred partner faced SEC charges during 2015. The charges related to the outfit’s penchant for “repeatedly putting customer assets at risk.” While not formally found guilty of the charges against it, the company suffered an irredeemable loss of credibility when it settled the SEC’s complaints with an $80,000 penalty for its behavior.

A securities firm and broker, Electronic Transaction Clearing has standing systems and IP that will allow Coinbase to present a convincing offer to institutional clients. The company will act as a custodian in Coinbase’s recently announced Coinbase Custody Service. The offer will provide secure storage facilities for digital currencies. Many commentators, however, point to the alarming marriage of financial custody and a history of negligence. More than hearsay, the SEC’s charges against ETC in 2015 were the product of detailed investigations and prima facie evidence. Clearly ETC felt so too, as it opted for settlement.

ETC exercised the option of a penalty payment to settle the matter. While it might have avoided formal proceedings, it remains apparent that the company is less than scrupulous and diligent in dealing with clients’ funds, a theoretically terminal lapse of credibility. In spite of this, Coinbase has chosen to partner with ETC to fulfill its desires to manage bigger accounts with associated funds.

Coinbase Looks Past Skeletons In ETC’S Closet

Although currently sitting on around $20 billion in digital assets, Coinbase hopes to grow its institutional sector to around $5 billion by year-end. While comments from the Coinbase Custody Services lead Sam McIngvale paint a picture of a successful startup making the best way it can into the future, nonetheless the skeletons rattle too loudly for some.

Speaking to Bloomberg, McIngvale said,

“we sort of have an understanding with the SEC and Finra, and it allows us to execute contracts with clients and take the first deposits.” So far so good, but he inexplicably continued by saying, “the company didn’t need an official approval, as it partnered for the service with SEC-regulated broker-dealer Electronic Transaction Clearing.”

There is a fundamental conflict in seeking to offer top-end “custody” of clients’ funds by forming strategic partnerships with people who seem incapable of the primary task. In a nutshell, Coinbase will be relying on a firm previously identified as reckless cowboys with nothing but their own interests at heart, to offer service of the highest level.

The details of the 2015 charges against ETC read, in part, that the SEC “found that ETC violated the Customer Protection Rule, which is intended to safeguard customers’ cash and securities so that they can be promptly returned if a broker-dealer fails.”

Noting further that “It requires broker-dealers to maintain physical possession or control of customers’ fully paid and excess margin securities,” it remains a mystery as to why a reputable project like Coinbase would willingly carry a sullied partner into its future.

Traders have neither applauded nor demonized the association, and the exchange has suffered no slump for its poor choices. Commentators observe that this might merely be because nothing “bad” has been able to ensue from the partnership, yet. In the fintech arena – when dealing with people’s money – no company can be cavalier in approach. That ETC “put customer securities at risk numerous times in 2015” should be sufficient for any retail or other trader to give the company and its partners a wide berth.

Coinbase’s Ugly Sister

In a serious knock to what has so far been a sterling history, observers remained nonplussed as to why the California project would risk tarnishing their standing by association with a company like ETC. As the entire cryptosphere swings towards moderation and remains keenly aware of new user adoption, to willingly associate with a tarnished fintech entity is considered by many a step backwards.

At the time of the SEC charges, it was found that ETC moved close to $8 million of customer-owned securities to meet margin requirements at another firm.

Whether institutional investors will view Coinbase as a viable partner remains to be seen.

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