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Coinbase launches new offshore derivatives exchange amid two new lawsuits

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(Kitco News) - Coinbase, the largest U.S.-based crypto exchange, announced that they have launched a new derivatives exchange in Bermuda.

“Today Coinbase launched Coinbase International Exchange and will begin by offering BTC & ETH perpetual futures settled in USDC with up to 5x leverage to institutional clients in eligible jurisdictions outside of the U.S.” they wrote in a twitter thread.

The company announced on April 19 that they had obtained a license from the Bermuda Monetary Authority as part of their ‘Go Broad, Go Deep’ international expansion drive. “As a global company, we’re working hard to help update the financial system by building trusted products that expand the utility & adoption of crypto because we believe crypto & blockchain technology have the ability to increase economic freedom & opportunity around the world.”

In a blog post, the company said the new exchange is operational and trading has already begun. Coinbase International Exchange will offer real-time 24/7/365 risk management with all liquidity provided by external market makers, meaning no proprietary trading.

“Perpetual futures accounted for nearly 75% of global crypto trading volume in 2022, creating highly-liquid markets and offering traders additional versatility in their trading strategies,” they wrote.

Coinbase has faced mounting pressure from regulators at home, including a Wells notice from the SEC in March, and last month CEO Brian Armstrong said that the company would consider relocation if the regulatory environment didn’t improve. Still, the company attempted to reassert their belief in the U.S. crypto market even as they reiterated their stance against “regulation by enforcement.”

“Rest assured that Coinbase is committed to the US, but countries around the world are increasingly moving forward with responsible crypto-forward regulatory frameworks to strategically position themselves as crypto hubs,” they wrote. “We would like to see the US take a similar approach instead of regulation by enforcement which has led to a disappointing trend for crypto development in the US.”

New lawsuit alleges privacy violations

Coinbase also faces a new privacy lawsuit in the United States. The May 1 filing by a Coinbase user claims the exchange’s requirement that customers upload a valid ID and a self-portrait in order for the firm to conduct Know Your Customer (KYC) regulations violates provisions of Illinois’ Biometric Information Privacy Act (BIPA).

The lawsuit argues BIPA required Coinbase needed to receive permission from users before collecting their biometric information and was obligated to explain the reason for collecting the data, how it would be used, how long it would be stored, and how the exchange would ensure its permanent destruction afterwards.

“Coinbase had no written policy, made available to the public, establishing a retention schedule and guidelines for permanently destroying biometric information,” the filing claimed, adding that the exchange’s “collection, obtainment, storage, and use” of this detailed biometric data is illegal and may expose users to “serious and irreversible privacy risks.”

“If Coinbase’s database containing facial geometry scans or other sensitive, proprietary biometric data is hacked, breached, or otherwise exposed, Coinbase users have no means by which to prevent identity theft,” the lawsuit alleges, and claims that once the KYC requirements to open a new Coinbase account were met, the biometric data should have been destroyed.

Delaware lawsuit alleges disclosure violations ahead of public listing

Another lawsuit filed May 1 in Delaware alleges that Coinbase’s senior executives knowingly withheld negative news before structuring their April 2021 public listing to maximize their own gains to the detriment of new shareholders, pocketing an additional $1.09 billion in the process.

The suit was filed by Coinbase investor Adam Grabski, and names Coinbase CEO Brian Armstrong as well as senior executives Marc Andreessen, Brian Armstrong, Surojit Chatterjee, Emilie Choi, Frederick Ernest Ehrsam III, Alesia J. Haas, Kathryn Haun, Jennifer Jones, and Fred Wilson.

The suit alleges that Coinbase’s board members and executive team knew two crucial pieces of information before the listing: The company’s revenue was under pressure due to customers’ objections to their transaction fees, with a document presented to the board saying Coinbase “must prepare for inevitability of fee compression.” The suit also alleges that the company was already planning the additional private sale of $1.25 billion in new convertible notes after the public listing, which would dilute the stake of all the new shareholders.

According to the lawsuit, the insider advantage of a direct listing over an IPO is that the shares being sold to the public were already owned by Coinbase executives and investors and would benefit them directly.

"On April 14, 2021, Coinbase became a Nasdaq-listed company, with its stock trading over $380 per share at the outset and as high as $429 per share in a volatile first day on the public markets," the suit alleges. "Defendants took full advantage of the absence of any lock-up in the Direct Listing, rapidly selling over $2.9 billion of Coinbase stock on the first day and in the days that followed, from April 14, 2021 through April 22, 2021."

Then, by May 18, after the stock had declined by more than 37%, Coinbase disclosed both negative pieces of information to the public. “Neither detail was disclosed in the offering prospectus or the preliminary results provided by the company prior to the Direct Listing on April 6, 2021.”

Coinbase has dismissed the lawsuit as baseless. “As the most popular and only publicly traded crypto exchange in the US, we are at times the target of frivolous litigation,” they told Bloomberg. “This is an example of one of those meritless claims.”

ARK acquires more Coinbase stock

The new lawsuits did not dissuade Cathie Wood’s ARK Invest from buying even more shares of the cryptocurrency exchange.

On May 1, ARK purchased 168,869 Coinbase shares worth around $8.5 million, including 129,604 shares for its ARK Innovation exchange-traded fund (ETF), 23,456 shares for its ARK Next Generation Internet ETF, and 15,809 for its Fintech Innovation ETF.

The May 1 purchases are equivalent to 50% of the total Coinbase shares bought by ARK in April, when they bought a total of 304,300 shares worth $17.5 million. ARK also bought 2.4 million shares worth $117 million in March.

Coinbase stock (COIN) hit an all-time low of $32.53 on Dec. 27, but it’s up 39% on the year. At the time of writing, it’s trading at $51.10, up 1.45% on the day.

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