Coinbase hit with twin lawsuits: Insider trading and unclaimed coins

Posted: 5 March 2018 6:52 pm
News

One lawsuit was lodged by someone who received bitcoin in 2013 but never bothered claiming it.

The Coinbase legal team must be busy. Two class action lawsuits were filed against the company in two days.

  • 1 March – Insider trading allegations. Someone who ended up buying Bitcoin Cash at $4,000, more than twice the price at which they placed the order, is the plaintiff.
  • 2 March – Unfair business practices. Two people who received bitcoin via Coinbase in 2013 and 2014, but never claimed it, want to get the full amount with interest, plus returns from all the forks and airdrops since 2013/14.


Insider trading

The lawsuit stems from the 20 December listing of Bitcoin Cash on Coinbase. Prices on the exchange spiked drastically after the token was launched, with some people cashing in and others inadvertently having their orders filled at much higher prices than they intended.

The lawsuit was filed "on behalf of all Coinbase customers who placed purchase, sale or trade orders with Coinbase or the GDAX in connection with Coinbase’s launch of BCH during the period of December 19, 2017 through and including December 21, 2017 (the “Class Period”) and who suffered monetary loss as a result."

On December 19, 2017, at 5 p.m. PST, Plaintiff attempted to purchase BCH within five minutes of Coinbase announcing that it was going to support BCH. Plaintiff’s orders were not executed until 1:06 p.m. December 20, at which time, Plaintiff learned that his order was executed and that he had purchased BCH at the inflated price of $4,200.98 per BCH. Plaintiff’s order was executed at prices 100% greater than the price at the time that he submitted his buy order."

As the suit explains the allegations:

"On 19 December 2017, a month after tipping off its own employees as to when it would commence fully supporting BCH, Coinbase suddenly announced that it was opening up its books to the buying and selling of BCH within minutes after its announcements. Unsurprisingly, those who had been tipped off, immediately swamped Coinbase and the GDAX with buy and sell orders, thinning the liquidity but obtaining BCH at fair prices.

The market effect was to unfairly drive up the price of BCH for non-insider traders once BCH came online on the Coinbase exchange. However, the remaining Coinbase customers were not so lucky... When Coinbase’s customers’ trades were finally executed, it was only after the insiders had driven up the price of BCH, and thus the remaining Bitcoin customers only received their BCH at artificially inflated prices that had been manipulated well beyond the fair market value of BCH at that time."

It's a fairly succinct explanation of what often happens whenever a hot coin is listed on a new exchange. The phenomenon has been dubbed "the Binance effect", referring to the quick price spike that follows a coin being listed on the prominent Binance exchange.

However, this lawsuit alleges that Coinbase staff unfairly used their insider knowledge to buy up ahead of time.

Only time, or a very prescient lawyer, can say which way this suit will go, but the ambiguous legal status of cryptocurrencies and exchanges might be a central point. Their characteristic volatility and complete lack of inherent value mean it might be a stretch to say that the cryptocurrency prices can ever be anything except fair.

Unfair business practices

Coinbase let users send cryptocurrency to people by email. Functionally this simply meant the recipient received an email telling them that they've been sent some cryptocurrency and to sign into or create a Coinbase account to claim it.

This lawsuit was filed by two different people who received 0.10 and 0.01 bitcoin by email in 2013 and 2014 respectively. Back then it was worth a few dollars, and they ignored the emails. Today the same amount is worth a whole lot more. They tried to recover it but the email links had gone stale.

The plaintiffs now want to get their bitcoin, all the proceeds from forks and airdrops, and compensatory damages (with interest) resulting from the Coinbase's "unlawful" holding of their rightful property.

"Plaintiffs seek... delivering such Cryptocurrencies as well as all “forks” thereof (e.g. Bitcoin Cash fork of Bitcoin), and “airdrops” related thereto (e.g., ERC20 airdrops of Ethereum related tokens), to Plaintiffs and the Class, and the State of California as appropriate."

These kinds of stories aren't uncommon. A lot of early bitcoin has left circulation, locked away in fried hard drives, wallets with forgotten passwords or owners that have passed away or simply forgotten that they ever received it. And now that it's worth something people are searching their memory banks for any amount they might be able to claim.

But the crux of this lawsuit is that Coinbase was running unfair business practices by requiring people to open a Coinbase account to receive their bitcoin and that the unclaimed cryptocurrency qualifies as unclaimed property. As such, Coinbase should have made more effort to hand it over to the rightful owners, and failing that, given it to the state of California.

But it seems unlikely that the state of California would even have wanted or been able to hold unclaimed bitcoin back in 2013, or that someone who didn't want to open a Coinbase account in 2013 would have preferred the option of setting up their own bitcoin wallet instead. Plus, back then actual classification of cryptocurrency was legally ambiguous. It might be a bit of a stretch to say that it qualified as "property" back then, rather than pure data.

The lawsuit requests a jury trial, which should be quite interesting to watch if it ends up going forward. But it seems reasonable to assume that these plaintiffs would be perfectly happy to settle out of court for an undisclosed amount instead.


Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM, SALT, BTC, NANO

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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3 Responses

    Default Gravatar
    NeilMarch 6, 2018

    I have bought a number of Crypto ‘s through CoinSpot which are listed on my account with them on individual wallets which are automatically assigned upon my purchase. Is this all safe enough or do I need to transfer them to some other wallets – or what?

      Avatarfinder Customer Care
      RonMarch 9, 2018Staff

      Hello Neil,

      Good day! Appreciate you contacting finder regarding your inquiry today.

      Each wallet should have their own security features to protect the stored altcoins so generally they should be safe depending on the level of security your wallets have. However, “Hot” wallets are slightly at a risk of theft/loss as compared to “Cold” wallets.

      — Hot: A wallet is hot when it’s connected to the Internet. Nothing on the Internet is 100% secure, so funds kept in a hot wallet are always at a slight risk of theft or loss from software bugs.

      — Cold: A wallet is cold when it’s safely offline and can’t be deliberately or accidentally compromised over the Internet. These are hardware wallets.

      Most users just go with the existing wallets that they have especially when they trade coins regularly. Some choose to go for hardware wallets for safe keeping and mostly for long term storage of their coins.

      All the popular hardware wallets are designed to be as secure as possible and can be backed up in different ways. Choose a hardware wallet that can hold the coins you want, has an interface you like and has a price tag that suits your needs.

      Ledger Nano S, KeepKey and TREZOR are all extremely popular hardware wallets. Their prices range from roughly $50 to $100, depending on the device. You can check more details here — https://www.finder.com.au/cryptocurrency/wallets.

      Hardware wallets will have additional security to prevent theft/loss. They’ll typically require you to enter a PIN in order to access it and have some backup options in the event of device loss.

      It would still totally dependent on you if you as you may still opt to keep the coins in your current wallet or you may choose to go for a hardware wallet for additional security.

      Hope this helps!

      All the best,

      Ron

      Default Gravatar
      NeilMarch 10, 2018

      Thanks Ron.

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