An earlier version of this article about dozens of people alleging Coinbase failed to protect cryptocurrency accounts from scammers included a photo of a billboard depicting the logos of Coinbase and Deadfellaz. Deadfellaz was not part of the dispute.
The requests were to no avail, scam victims say.
“They’re trying to be a financial institution without the infrastructure to back it up,” said Eric Rosen, a lawyer at Roche Freedman representing some 96 victims in the arbitration demand, which is akin to a lawsuit, filed against Coinbase.
“There were no procedures in place to stop these frauds,” Rosen said. “Of course, scammers quickly picked up on this, and directed victims to download the Coinbase Wallet.”
Many of the victims lost their life savings. The demand says that the rules requiring banks to reimburse debit-card users for unauthorized transfers also should apply to Coinbase’s customers.
“Coinbase is committed to protecting its customers from scams, fraud, and other crimes and has invested significant resources in protecting users against liquidity mining scams,” company spokeswoman Lisa Johnson said, responding to the arbitration demand. “A customer’s activities on Coinbase Wallet, including managing the wallet’s private security keys and access to the wallet’s contents, are exclusively controlled by the customer, not Coinbase,” Johnson continued, noting that the company offers many products so that consumers “can choose the products that are best for them.”
The arbitration could be the start of a reckoning over whether crypto’s ideology of self-reliance and software-driven governance can survive contact with the highly regulated mainstream financial system. If the arbitration demand results in an order that Coinbase reimburse its customers, it provides the possibility of a way forward for the victims of a massive ongoing scam that The Washington Post reported in April had already caused thousands of victims more than $60 million of losses. The individuals participating in the Coinbase arbitration demand, some of whom were scammed as late as this August, say they lost more than $21 million total.
Many were forced by Coinbase Wallet’s terms of service to turn to arbitration instead of challenging them through the U.S. courts. The decision of the arbitrator won’t set a formal legal precedent, but will help answer one of the top questions of the burgeoning crypto era: Do the existing rules of the financial system apply to cryptocurrency companies?
Unlike other scams in which someone is fooled into sending money somewhere, in this scheme, the individuals’ money was stolen straight out of their accounts. After meeting the victims through social media, dating apps or wrong-number texts, the scammers said high returns were available through “liquidity mining”; a would-be investor just had to buy a “mining certificate,” clicking through a prompt in Coinbase Wallet that said “confirm payment.”
The certificate wasn’t real, and the process wasn’t really a payment. Clicking on these innocuous-looking vouchers would record a single line of computer code granting the scammers permission to steal crypto deposited into an account weeks or months later. Coinbase “had no procedures in place to stop these frauds,” Rosen said. “They didn’t even appear to try. Of course, scammers quickly picked up on this, and literally directed victims to download the Coinbase Wallet.”
The victims tell similar tales: The scammer would spend weeks egging them on to invest more, until one day their money was gone. A victim advocacy group calls it a “pig butchering” scam in which the victims’ accounts are fattened like hogs for slaughter.
Reports from ProPublica and Vice say that at least some of the front-line scammers are themselves victims of human trafficking in Southeast Asia, forced to work under threats of violence. This week, the investor protection director in the state of Delaware issued a cease-and-desist order against more than 15 people it believes are “involved or working in conjunction with” those who contacted alleged victims.
But some of those who lost money say they see the perpetrators as only part of the story.
“I put the blame on Coinbase far more than even the scammers, because the scammers couldn’t have been effective without Coinbase,” James Osbun, who says he lost $77,000 to the scam, said in an interview.
The level of legitimacy conferred by a company such as Coinbase combined with a lack of red flags caused Osbun to proceed, he said, when he otherwise would have stopped.
“At minimum, let me know what my account is doing,” Osbun said, referring to the stealth smart contract. ‘You’re putting your funds at risk: continue? Yes or no?’ They didn’t even do that,” he added.
In the past few months, Coinbase adjusted the warnings it presents in its wallet app, now showing that a website is requesting permission to withdraw a huge sum of dollars from an account. (A wallet application inside Coinbase’s main app, however, appears still to be vulnerable; it does not make clear that signing a smart contract could let a website access someone’s entire balance.)
For years, regulators paid relatively little attention to crypto. But as its popularity with everyday Americans skyrocketed in 2020, claims of fraud soared, too, as borderless digital money turned into a gold rush for overseas thieves, including North Korea’s government.
Meanwhile, state and federal regulators have taken action against some firms. The Securities and Exchange Commission has begun pursuing cases against certain cryptocurrency companies and promoters, saying they violated securities laws. The cryptocurrency industry has fought back, arguing that those laws, which normally apply to stocks, shouldn’t be applied to decentralized digital currencies and tokens.
Experts think the significance of the Coinbase case goes well beyond these victims.
“If arbitrators find for these plaintiffs, that means anyone who’s lost money in a crypto scam is going to be calling a lawyer,” said Lee Reiners, policy director at the Duke Financial Economics Center and a fellow at Duke Law who has researched crypto and financial scams.