Coinbase, the brokerage giant and cryptocurrency exchange firm just announced to its fanfare about the successful onboarding of 10 new customers meant for the new custody service that was of institutional-grade. Meanwhile, it might come as a surprise given the fact that the partner ETC (Electronic Transaction Clearing) carries a low-lying repute when it is about safeguarding the customer funds.
Although Coinbase has been working over the process that would help with acquiring a regulatory approval for being operational as the broker-dealer, this development was only possible to post the slew of several acquisitions that stated that the firm fast-tracked its regulatory compliance journey with the help of ETC. It was also mentioned that the firm didn’t require gathering a formal approval generally provided by SEC (Securities and Exchange Commission) to launch its custody service.
The cause of this instant access is the fact that the firm released its product with ETC as the partner which was a broker who had already been operating as the institutional custodian. Nathaniel Popper, Reporter at the New York Times, stated that while Coinbase has been trying to set up some new service to help the big investors in comfortably accessing cryptocurrency, the fact that ETC, its partner has been charged for jeopardizing the customer assets by SEC might not help.
Four months post announcement of the first product for institutional custody and close to 4 months before its main launch event, the SEC went ahead and charged ETC for “Jeopardizing customer’s assets repetitively”.
As per SEC, the ETC has been tasked with the cause of safeguarding its customer’s assets. However, the firm illegally placed its customer’s capital for risky operations to serve its purpose. This cumulative cash count was close to $25 million. One instance of such negligence was when ETC used the $8 million from a client’s deposit to cover the marginal requirements for the funds borrowed by the company itself. A similar instance also proved that the firm used up $17 million from the customer’s deposit to cover for the loan collateral which was a repetitive scenario in the year 2015. ions
However, none of the funds deposited by the customers was directly hampered due to the alleged wrongdoings of ETC. Under any circumstances, these actions were against “Customer Protection Rule” which requires the custodians to allow a physical control or possession of the customer assets. The ETC didn’t deny or accept the allegations and agreed to submit the penalty which was equal to $80,000.