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Is Cobinhood a Legitimate and Safe Cryptocurrency Exchange?

Cobinhood in Brief

The newly released crypto exchange Cobinhood attracted some positive attention in the cryptocurrency community after it announced a zero-fee business model. This buzz, together with Cobinhood’s extensive marketing efforts, helped the exchange reel in over $10 million during its ICO and an additional $20 million during a venture capital funding round.

Though Cobinhood has managed to raise quite a lot of money, the way that it promoted itself generated controversy within the cryptocurrency community. In a YouTube video, Cobinhood CEO Popo Chen apologized for offering special deals to its celebrity promoters. Then, a Reddit post accusing the exchange of fraud went viral, despite the fact that the accuser did not provide any solid proof to back up his claims.

Read on for a detailed analysis of the facts summarized in the bullet points listed below.

Signs of legitimacy

  • Cobinhood’s leadership roster is public. All of Cobinhood’s key executives and over 70 Cobinhood employees have publicly accessible LinkedIn profiles.
  • A former presidential appointee is supporting Cobinhood. Former U.S. Federal Chief Information Officer Tony Scott supports Cobinhood and is one of the exchange’s advisors.
  • Cobinhood has attracted big investors. In August, IDG Capital lead a fundraising round that netted Cobinhood’s Dexon Foundation $20 million. Before that, Cobinhood raised over $10 million worth of ether during its ICO.
  • A history of delivering promises. So far, Cobinhood has managed to stick to its initial development timeline. It launched the open beta of its exchange platform and rolled out the ICO underwriting feature on time.

Possible red flags

  • Cobinhood’s unique business model may or may not be sustainable. Rather than generating revenue through commission fees, the exchange makes money by collecting margin trading fees and its Cobinhood ICO underwriting service.
  • Unequal treatment of customers. In exchange for promoting the Cobinhood ICO, the exchange gave actor Jamie Foxx and cryptocurrency pundit Ian Balina a buy-one-Cobinhood-token-get-one-free deal. (Later, Chen admitted this wasn’t fair to their other investors and apologized.)
  • A scam allegation that attracted attention on Reddit. A post from an anonymous user alleging that Cobinhood stole money from his account reeled in over 500 upvotes, but the complaint may not be legitimate.
  • Executives lack financial service experience. As is the case with several high volume crypto exchanges, Cobinhood’s core executives are young IT professionals that lack financial service experience.

Note: This article is provided for informational purposes only and is intended to provide a starting point for further research. Please exercise caution when using Cobinhood or any other cryptocurrency service. If you’d like to add information to this article, please reach out to us via email or in the comment section below.

Cobinhood’s Executive Leaders

As mentioned above, over 70 Cobinhood employees have publicly accessible LinkedIn profiles. The executives are young, but they have a considerable amount of experience in the areas of marketing and information technology. However, none of them seem to have any finance experience.

Here’s a quick overview of all the major names that have attached themselves to Cobinhood.

Tony Scott endorsement

In September of 2017, former White House CIO Tony Scott attached his name to Cobinhood and provided this comment about the exchange:

“This is a brave new world. Cobinhood and I share common goals in advancing the cryptocurrency industry in a way which protect consumers and those who are less informed on the safety and security of investments. There is a big debate right now about what the international rules should be for new currencies and I don’t think there are good answers yet. I look forward to advising Popo Chen and his team in helping to advance a leading cryptocurrency platform for the blockchain era.”

Cobinhood’s Main Investor

Cobinhood’s primary investor is the investment firm IDG Capital. The company was founded in 1992 and has funded over 700 different businesses. The firm’s portfolio is available on its official website.

Legal and Regulatory Compliance

Cobinhood has a typical KYC (Know Your Customer) policy. Unverified users can only trade cryptocurrency. Those who want to trade government-issued currencies have to provide identification.

Cobinhood CEO Popo Chen shared his exchange’s compliance goals with Jeff Berwick from The Dollar Vigilante.

“Our entity is in The Cayman Islands, and our development and operations team have many subsidiaries like in Hong Kong, USA, and Taiwan. The [team on] Taiwan is mainly focused on technical development, and so is the USA. And for each country that we operate in, we will get a license like in Japan, Korea, or Australia. And when more countries have regulations about this, we will be fully compliant with the local laws.”

Scam Accusation

Cobinhood’s beta trading platform is less than a year old, but so far it hasn’t experienced a publicized hack.

However, the exchange claims that two of its users exploited a bug in the interface and used it to obtain Cobinhood tokens that they shouldn’t have earned.

“Mr. Bossthirteen and his partner made three deposits into their Cobinhood account. The first two succeeded, but the later deposit failed because it was out of gas. Cobinhood’s deposit system misunderstood the failed transfer and erroneously credited the user’s account with an extra 87k COBs.”

Bossthirteen disagrees with Cobinhood’s version of the story and claims that the admins of the exchange stole money out of his account.

More details about the incident are available on Reddit.

Cobinhood’s Business Model

Revenue streams

This Cobinhood review claimed that the exchange’s business model is “not stated in the white paper.” However, this isn’t true. The white paper states that Cobinhood earns revenue by charging a fee on the earnings of Cobinhood’s peer-to-peer money lenders. Its ICO underwriting service is another revenue source.

When Chen spoke to The Dollar Vigilante, he compared Cobinhood to Goldman Sachs.

“They [Goldman Sachs] underwrite IPOs for companies their valuation now on NASDAQ is about a hundred billion and its revenue stream is about 80% from the IPO underwriting service.”

Transparency

Cryptocurrency exchanges aren’t required to publish their financial reports, and most of them don’t. However, Cobinhood would likely earn more goodwill and trust if it did share its internal audits in the interest of full transparency.

A Medium article published by Cobinhood states that the exchange “believes in 100% transparency” and “discloses all online and offline wallet address for public scrutiny, ensuring that no embezzlement can take place that a forensic audit won’t catch.”

The COB token

Cobinhood’s COB token is similar to Binance’s BNB coin. The BNB coin lets Binance users receive commission fee discounts. Likewise, COB allows Cobinhood users to get special discounts when they borrow money to buy cryptocoins.

Chen provided the following explanation to Jeff Berwick from The Dollar Vigilante:

“It’s a utility token that you can use to get [sic] margin loans. The margin trades come with interest rates, so when the margin traders lend from our liquidity, they pay the interest — but if you pay with COB, you will get 50% discount. What drives this is when the trading volume growth is larger, the demand for the COB token will grow larger. Another thing to remember is that we have an ICO underwriting service and we will allocate some of the tokens we got from the ICO for the underwriting service. And for us, we will allocate those tokens according to the percentage of the COB holders’ holding percentage, and you have a chance to get the new ICO tokens at a very low price.”

Final Word

Cobinhood seems to pass the smell test. If it is a scam, it’s a truly complex effort involving the manipulation of a large investment firm and a former White House government appointee. Only time will tell whether or not its unique business model will prove to be sustainable over the long term.

Alex Munkachy

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