A Tangled Web: Will Coinbase Ventures Lead to Conflicts of Interest?

Coinbase always seemed destined to add litecoin.

Even amidst an early sea of competing cryptocurrencies cloned from the bitcoin codebase, litecoin had secured a special place. Early adopters used it as a way to extend bitcoin gains and test out the tech, while effective marketing attracted mainstream interest (even without the technology offering much in the way of novel improvements).

That said, its own creator, developer Charlie Lee, didn't prioritize the project, and in 2013, decided to go full-time into bitcoin, joining what was then a San Francisco startup known for being the fastest and most friendly way to buy cryptocurrency in the U.S.

Indeed, on Aug. 2, 2013 Lee left Google to join Coinbase.

All this may seems like a bit of a history lesson, but there's potentially more to it. That's because Coinbase isn't any longer a little startup. Rather, the first "bitcoin unicorn" is fast becoming a big business, and on April 5, the company announced its latest expansion: a new venture capital arm.

But while little is known about the initiative (Coinbase declined to comment for this article), some believe they know enough to worry that the idea could result in conflicts of interest.

Notwithstanding the rumors about the company's culture and known lawsuits over alleged insider trading, Coinbase itself has added to the controversy through a stated commitment to investing in the people it knows.

The exchange said in a blog post announcing the new division: "You can expect that we'll enthusiastically invest in ideas from our own alumni network."

Smart strategy, perhaps. But, the tale of Charlie Lee (who also declined to comment for this story) provides a notable counterpoint.

Coinbase, as it turns out, would go on to add litecoin to its exchange while Lee was still an employee, though the August 24 decision was not without controversy. As reported by CoinDesk at the time, the price of litecoin began noticeably rising in advance of the listing announcement.

Some went so far as to speculate the 5 percent uptick was driven by "cryptic tweets," including those posted by Lee which weren't shy in promising news related to exchanges.

In this context, some people like Angela Walch, an associate professor at St. Mary's University School of Law, are concerned about the idea Coinbase could begin pursuing similar relationships with startups that may be involved in cryptocurrency and thus could influence the markets.

Walch speculated that Coinbase Ventures could have access to potentially market-moving information, such as which crypto projects are about the secure venture capital funding or which tokens are about to be listed on other exchanges. And these communities, too, she worries, might receive the same favoritism that seemed to plague the litecoin announcement.

She told CoinDesk:

"It's explicitly putting friendships and relationships on the table, which means people are likely to talk and share information freely, maybe in spite of rules."

Friendly relationships
That said, others see such concerns as overblown.

Indeed, those most enthusiastic about the new business are alums who have gone on to other notable ventures that continue to expand cryptocurrency in ways that Coinbase, through its already varied set of products and services, can't or won't.

"Coinbase Ventures will support early-stage technical teams building the future. I look forward to seeing what they do," said Olaf Carlson-Wee, the co-founder of Polychain Capital and a former Coinbase employee.

Further, defenders say effective policies could do much to mitigate issues - Coinbase has a policy in place to deter information sharing and employee trading based on such information.

But the exchange has once already taken heat for insider trading allegations.