Coinbase has been sued by nearly 100 of its users, who claim that the cryptocurrency giant ignored their complaints and took no action when scammers were able to exploit its Coinbase Wallet to drain tens or hundreds of thousands of dollars from their individual Coinbase accounts. These individuals claim to have lost a total of over $21 million dollars as a result.
Coinbase is a publicly traded company and the largest cryptocurrency exchange in the United States, and offers a variety of products for both retail and institutional cryptocurrency investors. The Coinbase customers have brought their claims through arbitration, rather than a lawsuit in state or federal court, likely because their user agreements with Coinbase require arbitration for all disputes. Arbitration is a confidential out-of-court proceeding where legal disputes are heard by a neutral decision maker.
Last fall, scammers used social media to convince people to download an app called Coinbase Wallet, which allows Coinbase users to access their cryptocurrency assets, and to buy and sell cryptocurrencies on so-called decentralized cryptocurrency apps, or “dapps.” Individuals who then downloaded the app were then sent to fraudulent websites purporting to be “dapps.” There, they were offered a digital “voucher” in order to participate in a liquidity mining pool. Liquidity mining is an arrangement where crypto investors lend money to decentralized crypto exchanges and receive returns on their investment. In this case, the “voucher” they downloaded contained a malicious “smart contract” – a line of code which gave the scammers full access to the funds in the user’s Coinbase Wallet and the ability to transfer those funds without any authorization. Many Coinbase customers lost substantial amounts of money – in some cases, their life savings
In their arbitration demand, the customers claim they warned the company for months about this security issue and the company did nothing, allowing hundreds of additional customers to have their Coinbase Wallets compromised. The demand further claims that instead of engaging with these customers, Coinbase instead directed them to a labyrinth of automated customer service, where automated “bots” refused to refund any money, denied that Coinbase was liable in any way, and accused the customers of allowing their own account credentials to be compromised. Coinbase allegedly declined to block or remove the malicious “dapps,” even after it had been informed that they were scamming its customers, and insisted that the only way to access Coinbase Wallet was through a user’s own credentials.
The customers claim that it was only after the arbitration demand was sent to Coinbase that Coinbase configured Coinbase Wallet to send warnings to its users that a third party was requesting permission to withdraw large sums of money from their account. The customers claim that had Coinbase provided these warnings earlier, as many of its competitors have done, then many, if not all, of the customer losses could have been avoided.
It is unknown how many Coinbase users lost money as a result of these scams. Unlike traditional bank accounts, cryptocurrency asset accounts are not insured by the Federal Deposit Insurance Corporation. if these investors cannot recover their funds through this arbitration, they likely have no other recourse.