Coinbase's partner in the Coinbase Custody project, an independent broker Electronic Transaction Clearing, was caught using funds entrusted to it by clients for its own interests.
Leading US cryptocurrency marketplace Coinbase began a serious journey towards obtaining broker-dealer status back in April and filed an application with the US Securities and Exchange Commission (SEC) to register as a licensed brokerage firm.
However, on July 2, the cryptocurrency platform officially launched the Coinbase Custody service. A week earlier, the exchange received its first test deposit, and is now ready for the full operation of the custodial service. Coinbase was able to carry out custodial activities and launch a new project without obtaining a brokerage license with the help of Electronic Transaction Clearing (ETC), which already acts as an institutional custodian and until recently had the full support of the SEC. However, ETC is now being investigated for illegally using escrowed client funds to secure its own financial transactions totaling over $25 million.
Thus, according to the SEC, Electronic Transaction Clearing used client funds to cover debt obligations on its loan and provide it as personal collateral. Such misuse of client assets was repeated several times during 2015.
Officially, the company does not comment on the situation that threatens not only its reputation, but also the reputation of its partners. Coinbase Custody was created for convenient storage of cryptocurrency by institutional investors and how potential clients will react to the SEC proceedings is still unknown. Even though Electronic Transaction Clearing did not cause any direct harm to customers and all investor funds were intact, such actions are considered by the SEC to be a violation of customer rights and the company paid an $80,000 fine for putting customer assets at risk.
An unidentified source told CCN that ETC's alleged violation occurred under previous management and noted that such minor violations are always present in the heavily regulated financial industry. Large firms such as JPMorgan have paid millions of dollars in fines without experiencing a significant decline in demand for their traditional financial products.
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