A proposed class action lawsuit has been filed in California against Coinbase, Inc., which does business as the Global Digital Asset Exchange (GDAX), one of the most popular and accessible cryptocurrency exchanges, and its CEO and director of communications. This case was filed on behalf of all Coinbase customers who placed purchase, sale or trade orders in connection with Coinbases’s launch of Bitcoin Cash (BCH) between December 19, 2017 and December 21, 2017.
First, tell me about Coinbase. (And then tell me about Bitcoin because I’m a little unsure about what that is and at this point I’m too afraid to ask.)
The 18-page complaint describes Coinbase as one of the most widely used cryptocurrency exchanges, where individuals can buy, sell and use Bitcoins as a currency with those who accept Bitcoins as payment. To maintain a Coinbase account, an individual needs a “wallet,” where his or her Bitcoins are stored. Coinbase’s GDAX is a currency exchange that the lawsuit notes caters mostly to institutional and professional cryptocurrency traders.
Though Coinbase and GDAX serve as the most out-front platforms through which an individual can buy more or store Bitcoin, the entities are not to be confused with Bitcoin itself. Bitcoin, the most popular and valuable cryptocurrency, is a decentralized digital currency that runs on a peer-to-peer basis. What powers Bitcoin is individual users who keep all Bitcoin transactions documented on a visible ledger, available to all users, called a blockchain. The complaint explains:
A Blockchain is a continually growing chain of blocks of cryptographically secured records of transactions. Blocks are created when the distributed computers complete the work of cryptographically securing the information.”
Any changes to the blockchain’s software are controlled and agreed upon by a collection of miners and developers, the case adds, not Coinbase or GDAX.
The “Hard Fork”
The plaintiff’s allegations stem from a “hard fork” set in motion in early 2017 that Bitcoin miners and developers determined would effectively split the cryptocurrency in two and create a second blockchain, as well as a new cryptocurrency called Bitcoin Cash. This “hard fork,” the lawsuit explains, was in response to both the increased exposure of cryptocurrencies, namely Bitcoin, and the consequent increase in the number of transactions being performed on the GDAX. According to the lawsuit, Coinbase’s miners and developers said that the “hard fork” would occur around August 1, 2017.
Responding to the announcement of the “hard fork,” Coinbase disclosed that it was unprepared for the split and would not support Bitcoin Cash. According to the lawsuit, the company informed customers in July 2017 that if they intended to participate in Bitcoin Cash, they should withdraw their Bitcoins from the exchange. Predictably, this caused a wave of withdrawals.
In early August 2017, the lawsuit says, Coinbase did somewhat of an about-face. Though Coinbase and GDAX still would not support the new cryptocurrency, the defendant announced it would allow those who were customers at the time of the “hard fork” to withdraw their Bitcoin cash – but not until January 2018. From here, the complaint goes into detail on what allegedly took place next:
On December 19, 2017, a month after tipping off its own employees as to when it would commence fully supporting [Bitcoin Cash], Coinbase suddenly announced that it was opening up its books to the buying and selling of [Bitcoin Cash] 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 [Bitcoin Cash] at fair prices. The market effect was to unfairly drive up the price of [Bitcoin Cash] for non-insider traders once [Bitcoin Cash] came on line on the Coinbase exchange.”
The effect of this, the lawsuit continues, was that remaining Coinbase users, after all the alleged insiders sold their shares, were left out in the cold when the defendant stopped trading in Bitcoin cash and canceled other customers’ outstanding orders because “there was no more liquidity in the issue.”
“They opened [Bitcoin Cash] for purchase, sale and trading the next day,” the complaint says, “and again within minutes, closed the books and canceled all the outstanding [orders] while insiders and those who had prior knowledge of Coinbase’s confidential information, were able to buy, sell and trade.”
Coinbase customers were eventually able to execute their trades, the lawsuit claims, but only after the alleged insiders had driven up Bitcoin Cash prices “well beyond the fair market value of Bitcoin Cash at that time.”
To date, the complaint rounds out, neither Coinbase nor its CEO have disclosed the results of a supposed internal investigation into the alleged insider dealings.
Calls for Class Action Litigation in December 2017
In December 2017, a Reddit user posted a call to action in r/Coinbase seeking to get the wheels moving on potential class action litigation in response to how Coinbase handled the Bitcoin Cash offering the previous summer. Though the user says his or her account was eventually credited with Bitcoin Cash, the individual claims they were one of those not credited with Bitcoin Cash due to Coinbase’s alleged actions when the “hard fork” went down on August 1.