On September 18th, the New York Attorney General’s office released a scathing report on crypto exchanges. Three (Binance, Gate.io and Kraken) were referred for prosecution, and the largest crypto exchange – Coinbase – was described as maintaining a “proprietary trading” operation that faced Coinbase clients and accounted for 20% of total trade volume on the exchange. On September 19th, Coinbase posted a blog report stating that the NY AG’s report was untrue, and that Coinbase “does not operate a proprietary trading desk, nor does it undertake market making actions.”

So who’s telling the truth? Is Coinbase running a prop desk or not?

My belief – and to be clear I do not have a dog in this fight, and I am happy to be disabused of these opinions if I’m working from incomplete or erroneous information – is this: Coinbase is telling the truth. They do not run a prop desk.

It’s worse than a prop desk.                                                                          

At least a prop desk takes risk. The Coinbase proprietary trading operation (yes, the NY AG is telling the truth, too) that faces their retail client base through “Coinbase Consumer” takes ZERO risk when it pockets a spread between their worse-than-market offer to retail clients and their on-market bid to professional clients. They are a middleman (while carefully avoiding the legal designation of “market maker”) that executes a trade with retail clients for $x per Bitcoin and then immediately offloads that risk with professional clients at a trade for $y per Bitcoin, pocketing the essentially risk-free profit between $x and $y.

AND they charge a commission on the trade.

Again, if I’m working from bad information here (1% per trade in commission fees, $30-40 spread over past few months of BTC price at $6,000-8,000, commensurately higher spread when BTC price was higher), then by all means set me straight and I’ll be happy to restate my conclusions here. I really mean that. Barring that …

A pretty good definition of a prop desk is this: do you make more money facing your clients in trades than you do in the commission fees you charge clients for executing the trades?

As I understand the way Coinbase makes money in Coinbase Consumer, where on EVERY transaction you have a commission fee of 1% AND a spread profit of something like 0.5%, the answer to that definitional question is clearly NO – this is not a prop desk. Yes, they have proprietary trading (so the NY AG is correct), but no, that proprietary trading is not “a prop desk”. Why not? Because Coinbase makes more money on commissions than they do on prop trading.

But the reason it’s not a prop desk isn’t that their proprietary trading profits are so small … no, it’s that their commission fees are so egregiously large. AND they are pocketing these proprietary trading profits with ZERO risk.

To use the OG Saturday Night Live line, it’s both a floor wax AND a dessert topping.

Coinbase says they do this “to provide an easy-to-use customer experience.”

I say, to steal the immortal Ron Burgundy line, “I’m not even angry … that’s AMAZING.”

We’ll see what financial regulators and Coinbase clients have to say.