Coinbase to Pay $6.5 Million to Settle CFTC Investigation Over Trading

Coinbase issued a statement saying the investigation didn’t allege any harm to customers. “We proactively engaged with the CFTC throughout their investigation, and we believe that our conversations were constructive and contributed to an outcome that is satisfactory for both parties,” the company said.

The enforcement action shows how Wall Street regulators such as the CFTC, which oversees derivatives markets, have moved to police conduct in the new world of cryptocurrencies and digital assets.

The CFTC has asserted its right to police trading in cryptocurrencies, such as bitcoin, that have been deemed to be commodities. The CFTC doesn’t write rules or inspect bitcoin exchanges, as it does for futures and swaps, but it retains authority to intervene when it suspects fraudulent or manipulative activity.

Coinbase, which was founded in 2012 as a platform to trade bitcoin, has 43 million users and serves 7,000 institutional customers, according to the prospectus filed for its direct listing. In such a transaction, companies let their shares float on a stock exchange, enabling them to trade publicly and allowing early investors or employees to sell shares to the public.

The claims against Coinbase date from a period between 2015 and 2018 and relate to trading on an exchange now known as Coinbase Pro. The company operated two programs that generated orders that sometimes traded with each other, the CFTC said in a settlement order.

Coinbase includes those trades in figures it disclosed to services that disseminate volume and price information about bitcoin to the public, the CFTC said. That meant traders could have received a misleading sense of volume on Coinbase Pro, the CFTC said.

The CFTC alleged in the same order that a former Coinbase employee engaged in similar conduct, which the agency deemed to be “wash trading,” a prohibited tactic that involves intentionally submitting buy and sell orders that match, thereby creating a trade, but without a change in ownership of the asset. Wash trading is banned because it creates a misleading appearance of trading volume and can deceive others into believing there is more liquidity than there really is.

The alleged wash trades occurred in the bitcoin-litecoin trading pair during a period of six weeks in 2016, the CFTC said. Litecoin is a cryptocurrency similar to bitcoin. The trades were made between accounts associated with the former employee’s personal email address, the CFTC said.

CFTC Commissioner

Dawn Stump,

a Republican, said in a statement that she supported the enforcement action but worried it sends the wrong message about the agency’s authority to regulate bitcoin exchanges like Coinbase. The CFTC can pursue fraud and manipulation in cash markets for commodities such as bitcoin, but its core authority is limited to derivatives markets.

“I believe that this case reflects poorly on the commission’s enforcement priorities,” Ms. Stump wrote.

Enthusiasm over cryptocurrencies has propelled Coinbase to an eye-popping valuation in recent private-market trading. In a regulatory filing earlier this week, the firm disclosed that its shares had recently changed hands at a price that would give it a valuation of $67.6 billion, based on the number of shares outstanding as of Monday.

The number could be even higher if calculated on a fully diluted basis, including restricted stock units and options. That means that when Coinbase goes public, it could be poised to have a larger market capitalization than some traditional exchange operators, such as Nasdaq Inc. or

Intercontinental Exchange Inc.,

parent of the New York Stock Exchange.

—Alexander Osipovich contributed to this article.

Write to Dave Michaels at dave.michaels@wsj.com