Trading teams at Crypto.com exchange raise conflict questions

Crypto.com, the exchange endorsed by Hollywood actor Matt Damon, deploys internal teams to trade tokens for profit, the latest sign of potential conflicts of interest in the digital assets industry.

The Singapore-based group, one of the top-10 crypto marketplaces in the world, operates proprietary trading and market making teams, according to five people with direct knowledge of the matter. 

In most markets, exchanges match buyers with sellers at the most competitive transparent price. Market making and prop trading are usually conducted by separate private companies.

US regulators have begun clamping down on similar activities at other digital asset exchanges. This month the US Securities and Exchange Commission hit Binance, the world’s biggest crypto exchange, with 13 charges including using a trading firm owned by chief executive Changpeng Zhao to engage in “manipulative trading that artificially inflated the platform’s trading volume”.

“These trading platforms, they call themselves exchanges, are commingling a number of functions,” SEC chair Gary Gensler told CNBC on June 6, adding: “In traditional finance, we don’t see the New York Stock Exchange also operating a hedge fund, making markets.”

The existence of internal traders at Crypto.com has not been widely known since the company launched in 2016.

One of the people with direct knowledge about the teams said that Crypto.com executives gave other, external trading houses “absolutely dramatic sworn statements that Crypto.com was in no way involved in trading”, while another said that employees were asked to “say there is no internal market maker type operation”.

In response to questions from the Financial Times, Crypto.com said that employees had not been asked to lie to other market participants.

Crypto.com said: “We have an internal market maker that operates on the Crypto.com exchange and that internal market maker is treated exactly the same as third-party market makers that identically facilitate tight spreads and efficient markets on our platform.”

“This is not a controversial practice,” the company added.

The company said that most of its revenues came from its app for retail traders where Crypto.com was the customers’ counterparty for transactions and which it ran as a broker model. “As such, the Crypto.com trading team ensures that Crypto.com is risk neutral by hedging these positions on a number of venues, including the Crypto.com exchange,” the company added.

Its exchange is for institutional traders and “operates as a level playing field trading venue”, the company said.

The proprietary trading desk trades both on the company’s own exchange and other venues, the people with knowledge of the company’s practices said. The proprietary trading team has the sole goal of making money “and not facilitating an exchange”, one person said.

The market making desk at Crypto.com tries to boost liquidity on the venue, the people added.

“All companies operating in the trading industry compare volumes to their competitors,” Crypto.com said, adding that their priority was to “continuously improve order book liquidity and lowering spreads as it results in a more efficient market for all participants”.

The company added that “participants on the platform, including market makers, are treated equally,” and that the company “does not rely on proprietary trading as a source of revenue”.

Crypto.com is a private company and publishes accounts in various countries, including Malta, which do not show revenue by business line.

Set up by four people including current chief executive Kris Marszalek and chief financial officer Rafael Melo, Crypto.com has traded $35bn in spot crypto and $21bn in crypto derivatives so far this year, according to CCData. 

Its profile has soared in recent years through a series of splashy sponsorships and sport deals. It hired Oscar-winning actor Damon to promote the exchange at the Super Bowl last year, while its logo has been emblazoned across football stadiums during the Qatar World Cup and Formula One racing circuits. It has a multiyear partnership with basketball icon LeBron James and 20-year naming rights to a major sporting arena in Los Angeles.

After the SEC’s enforcement actions, the company said its exchange for institutional US traders would be shutting from June 21 because of limited demand “in the current market landscape”.