Five File Class Action Against Kraken over May 7 Ether Cryptocurrency 'Flash' Crash

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Payward, Inc., which does business as Kraken, is the defendant in a proposed class action lawsuit filed over a May 7, 2017 “flash” cryptocurrency crash that not only exposed “fatal flaws” in the defendant’s self-proclaimed most reliable and secure software in the world, but also allegedly froze and/or liquidated the Ether holdings for the suit’s five multinational plaintiffs and proposed class members.

Filed in Florida, the 14-page lawsuit claims the defendant on May 7 was hit with a Distributed Denial of Service (DDoS) attack and a simultaneous “flash crash,” and that either occurrence may have caused the price at which Kraken valued Ether, 2017’s cryptocurrency du-jour that, like Bitcoin, has no central repository or single administrator, to nosedive by more than 70 percent. Intriguingly, the case continues, the value of Ether shot back to that of its previous position after merely one hour of business downtime.

While Kraken publicly claimed it found no evidence of a coordinated attack or evidence of market manipulation, the lawsuit alleges the timing of the DDoS and Ether flash crash cannot be mere coincidence, as Kraken users were reportedly locked out of their accounts “between the moment when Kraken perceived the non-existent Ether market crash and when the market was ‘restored.’”

The lawsuit alleges that during this lock-out period, Kraken liquidated the Ether holdings of customers who held the cryptocurrency in their margin accounts, which, in the blossoming yet embattled cryptocurrency landscape, essentially allows individuals to use bitcoin purchased from brokers as collateral to buy holdings.

“In an instant, Kraken wiped out all or most of [the plaintiffs’] and the class’ accounts—burdening them with the costs of the phantom Ether crash without allowing [the plaintiffs] and the class to manage their accounts of benefit from Kraken’s restoration of Ether to its proper value less than sixty minutes later,” the plaintiffs claim.

The proposed class covered by the lawsuit includes all Kraken account owners who:

• Deposited Ether at Kraken;
• Had the cryptocurrency on margin in a Kraken account; and
• On May 7, 2017 had their margin accounts frozen and liquidated by Kraken.

The plaintiffs allege Kraken’s conduct caused damages in excess of $5,000,000.