Wash Trading on Coinsquare Allegedly Traced Directly to CEO: Report

The Canadian crypto exchange describes itself as "a fully regulated money services business (MSB)."

Just a few days after Canadian exchange Coinsquare revealed that it may have experienced a data breach that affected thousands of users last year, the exchange has come under fire once again: this time, the exchange’s chief executive has been accused of orchestrating an illegal wash-trading scheme on the exchange’s platform.

Vice originally reported the accusations on June 13th, claiming to have obtained a number of Slack messages, leaked emails, and other files that held evidence that Cole Diamond (the exchange’s CEO) was ordering employees to take part in executing wash-trading-related activities.

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The term ‘wash trading’ describes when an exchange artificially inflates its trading volume, making itself appear to have higher liquidity and, thereby, attracting higher-volume traders. Unfortunately, this is a widespread practice in the cryptocurrency industry. 

This is typically done by executing larger zero-fee market trades into their own orders, which creates the illusion of large trading activity. The reality, however, is that the funds never actually change hands.

Due to its association with price manipulation, this practice is generally considered to be illegal in Canada and in most (if not all) regulated financial markets. Coinsquare describes itself as “a fully regulated money services business (MSB).”

CEO allegedly ordered an employee to turn wash trading “back on” after it had been disabled

A number of messages obtained by Vice reportedly contained employees’ concerns about the risks to their careers posed by the wash-trading behavior on the exchange; one email reportedly expressed ”[concerns] about the reputational risk this posed to us as professionals.”

However, another of the messages allegedly details an exchange in which one of CoinSquare’s employees disabled the code that executes the wash trading on CoinSquare, only to be admonished by the exchange’s CEO and told to turn it back on.

The employee reportedly told the CEO that they “didn’t want to test OSC with it,” referring to the Ontario Securities Commission. According to company emails, the OSC had visited the company just a few days earlier.

However, Cole allegedly responded by saying that “whoever did that took ZERO steps to ensure that a MASSIVE change to how we are viewed externally would be enormous.”

“Turn back on please.”

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Concerns arose in the crypto community in the past

Vice also reported that members of the cryptocurrency community on Reddit had previously expressed concerns about odd trading behavior on Coinsquare; for example, some users noticed that much of Coinsquare’s trading happened outside of normal trading hours as far back as August 2018; others suspected that some of Coinsquare’s trading volume may be false.

Coinsquare faking volume from r/BitcoinCA

“The wealth OTC trading desk says it’s open Monday to Friday EST business hours, and yet the large off-orderbooks transactions that seem to make up the bulk of their trading volume also seem to occur on weekends & at night,” Reddit user 782748424788 wrote on August 29 ,2018.

“The regularity of the transactions, and the fact that they don’t interact with the orderbook makes it seem suspect.”

It’s not yet clear if the OSC is investigating Coinsquare over the allegations of wash trading.

Kristen Rose, manager of public affairs at the OSC, declined to tell Vice if an investigation was underway:

“As a matter of general policy, we are unable to speculate, confirm or comment on the existence, status or nature of any complaint, review or investigation,” she said.

“This is to protect the integrity of investigations, to ensure the complaint process is not used to affect the market and to promote fairness towards those who are the subject of investigations.”

The news of the wash trading allegations comes less than a week after Coinsquare confirmed that its customer information was stolen by an ex-employee last year; cybercriminals have since gotten ahold of this data, and may  attempt to carry out SIM-swapping attacks.

Finance Magnates reached out to Coinsquare for comment, but did not receive an immediate response. This piece will be updated as comments are received.

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