Cryptocurrency Exchange CEO Ordered Employees to Make Fake Trades, Leaked Documents Show

Canadian exchange Coinsquare was practicing so-called 'wash trading', according to leaked emails, Slack chats, and other files. Generally, wash trading violates securities law.
June 12, 2020, 2:46pm
Bitcoin
Image: Shutterstock

Canadian cryptocurrency exchange Coinsquare has been artificially inflating how much currency it is trading, according to leaked emails, Slack messages, and other files obtained by Motherboard.

According to the material, Coinsquare was "wash trading," which means it was automatically buying and selling currency between accounts it controlled. The news provides evidence of a practice that is often suspected in the cryptocurrency world but rarely proven, and can draw attention from regulators.

"Turn it back on," one seemingly angry March 2019 Slack message from Coinsquare CEO Cole Diamond to other employees of the company read, referring to the code that managed internal trades after an employee switched it off, fearing retaliation from regulators.

Do you have internal documents from cryptocurrency exchanges? We'd love to hear from you. Using a non-work phone or computer, you can contact Joseph Cox securely on Signal on +44 20 8133 5190, Wickr on josephcox, OTR chat on jfcox@jabber.ccc.de, or email joseph.cox@vice.com.

Coinsquare lets users buy or sell Bitcoin and other digital currencies. With wash trading, it seems like more currency is coming in and out of the company, signifying a healthy exchange which other people may want to use, or perhaps looks more attractive to potential investors. In reality, the exchange is just trading coins with itself.

Wash trading is illegal with stocks and futures, including the U.S., because it can be used to manipulate prices. Cryptocurrency has a particular problem with the practice; one study found that nearly 95 percent of all Bitcoin trading is artificially created by unregulated exchanges. Coinsquare, however, describes itself as "a fully regulated money services business." Generally speaking, wash trading violates Ontario's securities law. Specifically, a person or company shall not act in a way that "results in or contributes to a misleading appearance of trading activity in, or an artificial price for, a security, derivative or underlying interest of a derivative," a section of the Ontario Securities Act reads.

Several of the leaked documents specifically show Coinsquare CEO Cole Diamond pushing for the company to practice wash trading, and employees of the company being uncomfortable with the practice. The documents allege that Coinsquare performed wash trading at least during 2018 and 2019.

"[He] said he didn't approve, but that he did it because Cole asked him to," one email between colleagues reads, referring specifically to an employee being told to practice wash trading. "The decision to continue wash trading was final by Cole," the email reads, adding that senior staff asked others to stop using the term "wash trading" in email and Slack messages as it could create a problematic paper trail for the company.

"Turn it back on."

One employee who was able to disable the code decided to do so, seemingly in anticipation of an upcoming visit from regulators, according to the leaked material. In a Slack message, Diamond asked who disabled the code that managed internal trades.

"Me," an employee replied. "Didn't want to test OSC with it," they added, referring to the Ontario Securities Commission, essentially the Canadian province's version of the Securities and Exchange Commission which combats insider trading and other financial crimes. The OSC had visited the company just a few days earlier, according to company emails.

"But whoever did that took ZERO steps to ensure that a MASSIVE change to how we are viewed externally would be enormous," Diamond replied. "Turn back on please."

External parties had already spotted something wrong with Coinsquare months earlier. In August 2018 cryptocurrency enthusiasts on Reddit noticed that much of Coinsquare's trading happened outside of normal trading hours. Others suspected Coinsquare was faking how much the company was really trading.

A section of what a source said was Coinsquare code, obtained by Motherboard, indicates that wash trading occurred while trading Bitcoin and Canadian dollars; Bitcoin and Ethereum; and Bitcoin and Litecoin. The code was designed to buy and sell while wash trading at randomly chosen prices and volumes, according to the file.

Multiple employees were worried about the ramifications of practicing wash trading, according to the emails and messages. A number of workers were "concerned about the reputational risk this posed to us as professionals," one of the emails reads.

Kristen Rose, manager of public affairs at the OSC, declined to say whether the organization is investigating Coinsquare over wash trading.

"As a matter of general policy, we are unable to speculate, confirm or comment on the existence, status or nature of any complaint, review or investigation. This is to protect the integrity of investigations, to ensure the complaint process is not used to affect the market and to promote fairness towards those who are the subject of investigations," she wrote in an email.

Coinsquare did not respond to multiple requests for comment.

Subscribe to our cybersecurity podcast, CYBER.