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Coinbase-Neutrino scandal explained

06 Mar 2019

Coinbase-Neutrino scandal explained: The largest US exchange and a spying company

Recently, the largest US-based cryptocurrency exchange, Coinbase, ended up being in the center of a large scandal after acquiring a controversial blockchain analytics company called Neutrino. The scandal had significant consequences for Coinbase, which was quite a respected and influential company up to that point, and it ended up being a PR disaster. But, even now, many remain confused as to what actually happened, what are the consequences, and what can be learned from this situation.

What happened?

As mentioned, Coinbase has recently acquired a blockchain analytics company called Neutrino. However, it was then discovered that the company's founders were also the same people responsible for leading a notorious Italian IT firm called Hacking Team. Hacking Team had quite a bad reputation due to its software allowing authoritarian governments to spy on the citizens, and as a result, a new movement called #DeleteCoinbase erupted on the internet, with Twitter leading it.

This was hardly a surprising reaction, considering that Hacking Team was considered one of the five corporate enemies of the Internet. The company cooperated with the government of multiple countries, including Morocco and Sudan, which allowed these governments to violate freedom of information as well as basic human rights of their citizens.

The company was even involved with the Saudi enforcement unit that was responsible for the murder of a newspaper's correspondent, and it was also found to be helping Ethiopia maintain its repressive regime by monitoring the activities of its citizens. It is easy to see why this company ended up being on the world's (and the internet's) black list, which makes it that much more concerning when Coinbase acquired a company created by the same people who ran Hacking Team.

The backlash was huge, as mentioned, and many have reacted by deleting their Coinbase accounts as a result. It is not known how many people did it at this point, but many also tried and found that they are unable to do so, as they first had to empty their accounts completely.

How did Coinbase respond?

After the situation erupted, Coinbase stated that they were aware of Neutrino's founders' history with Hacking Team. The exchange stated that they do not condone Hacking Team's actions, but that the acquisition of Neutrino was necessary due to the technology that the company has to offer.

According to the company's head of institutional sales, Christine Sandler, it was imperative to acquire Neutrino as previous third-party providers of the same services were caught selling client data. While this is a good thing in a way, users now have to trust Coinbase to handle their data with due care, but the company's actions have violated that trust.

While it is unlikely that Coinbase planned to spy on its users, purchasing a company connected to people known for spying was clearly not the best move. The lack of trust is a big problem in the financial industry, and making shady and controversial moves was already done by the banks, which has caused people to lose trust in them. This did not exactly damage them, but it did lead to the very creation of cryptocurrencies, eventually.

Coinbase, while huge in regards to its user base, is now making similar mistakes. What this, as well as any other exchange, need to do id hold themselves to a higher standard if they are to win back the users' trust. DEXes are on the rise, and the emerging Lightning Networks will soon provide users with alternatives unless the exchanges find a way to set things straight.

Coinbase has already made steps towards doing it by announcing that it will let go everyone who has a connection to Hacking Team.

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