Any institution regularly dealing with customers’ money will be a prime target for lawsuits, but Coinbase, one of the most popular crypto exchanges on the scene, has been practically showered with legal complaints just this past month, all of them aspiring class action suits.
On Tuesday, a class action suit was filed in California district court, arguing that Coinbase routinely fails to secure accounts. The plaintiff in the suit, Manish Aggarwal, alleges his Coinbase wallet was drained of $200,000 in April this year, according to the complaint. The suit further states that when Aggarwal tried to go to Coinbase with the issue, the systems put him through “a recursive loop of impenetrable screens that prevented him from explaining his situation to any human being and was incapable of redressing the theft of his savings.”
Attorneys claim that Coinbase told Aggarwal somebody had gained access to his account through his Google Authenticator code. According to the complaint, Coinbase told him it isn’t liable for stolen crypto is “unconscionable and unenforceable” under California policy.
A spokesperson for Coinbase told Gizmodo in an email statement the company takes “extensive security measures to ensure our customer accounts remain safe. We educate our customers on how to avoid cryptocurrency scams and report known scams to appropriate law enforcement authorities.”
Though this latest suit against Coinbase is just a drop in the bucket for overall crypto wallet hacks, four separate lawsuits have come down on the Los Angeles-based crypto exchange since the start of August. It all started barely more than a week after the Securities and Exchange Commission announced it was investigating whether the exchange had improperly categorized its assets when it allegedly should have been listing its holdings as securities all along. Just a few days before that news dropped, the SEC had also brought the hammer down on former Coinbase manager Ishan Wahi, alleging he’d committed insider trading by tipping his brother and a friend about trades.
Debate over whether crypto should be treated as a security has come up again and again in recent months. Gary Gensler, the SEC chair, wrote in a Wall Street Journal op-ed last week opining “There’s no reason to treat the crypto market differently from the rest of the capital markets just because it uses a different technology.”
The first of two civil lawsuits filed Aug. 4 claimed Coinbase had routinely lied and misled users about the assets the company was putting into the exchange. Plaintiffs of the class action suit filed by investment law firm PomerantzLLP in New Jersey district court argue Coinbase hadn’t told users that their assets could be used as the exchange’s property if it ever went into bankruptcy, and that all the money put into Coinbase should have been registered as securities. A second aspiring class action lawsuit, filed in Delaware district court that same day, similarly wants to hold the exchange’s feet to the fire over whether the company would use its users crypto as its own assets in case of bankruptcy.
The lawsuits base this complaint about protecting their assets in case of bankruptcy on a May 10 quarterly filing, which stated:
“Because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.”
Coinbase has, of course, clapped back against this last complaint in particular. CEO Brian Armstrong went out of his way to tell users they were in “no risk of bankruptcy” but that the SEC disclosure was part of a requirement by the federal agency. He also apologized to users for not making it clear that legal protections of crypto assets “have not been tested in court” and that it’s “possible” crypto would be considered company assets if the company ever went belly up.
But the legal carrion birds weren’t done circling. Another aspiring class action complaint followed the first two later in August, filed by Georgia resident George Kattula along with over 100 other Coinbase wallet holders. The complaint, filed in Georgia district court Aug. 15, argued Coinbase has not registered its assets as securities, has not kept its customers’ accounts secure, and has in the past locked consumers from accessing their accounts “for extended periods of time or permanently,” while failing to respond to complaints.
Users have made rumblings about issues accessing their account funds, fearing the exchange was about to cut off users from their crypto like others have before. The company previously told Gizmodo the issue arose due to backend technical problems that had been fixed. Still, despite attempts to calm the nerves of Coinbase’s millions of users, the company has had to distance itself from failed crypto firms like Celsius or Three Arrows Capital to show that it’s not yet ready to haul up its own tombstone.
Paul Grewal, Coinbase’s chief legal officer, has gone out of his way to tell users “Your funds are your funds, and your crypto is your crypto.”
All together, these aspiring class actions still have a long way to go before any financial penalties reach the hands of the plaintiffs. The Aug. 15 lawsuit is looking for damages in the ballpark of $5 million for the members of the class action.
Coinbase has struggled hard amid the ongoing crypto winter. Initial reports of the company rescinding job offers from prospective employees were followed up by an announcement the exchange was cutting over 1,000 staff positions. In a recent interview with CNBC, Armstrong said he expects this ongoing crypto winter to last a year to a year and a half, or perhaps even longer.