Crypto scam victims seek to hold Coinbase responsible for losses

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Over the past year, thou­sands of peo­ple have lost tens, if not hun­dreds, of mil­lions in cryp­tocur­ren­cy when gangs of sophis­ti­cat­ed scam­mers whisked their mon­ey out of their accounts, which are man­aged by an app from the pub­licly trad­ed cryp­tocur­ren­cy giant Coinbase.

Now those vic­tims are fight­ing back. Near­ly 100 peo­ple are try­ing to hold Coin­base account­able, say­ing the com­pa­ny didn’t do enough to pro­tect them. Scam vic­tims says they noti­fied the com­pa­ny, beg­ging it to fix defects in its Coin­base Wal­let soft­ware that had allowed the vic­tims unknow­ing­ly to grant the scam­mers access to their accounts.

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.

An ex-cop fell for Alice. Then he fell for her $66 mil­lion cryp­to scam.

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.)

Is cryp­to a house of cards? A time­line of the unsta­ble industry.

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.

How state reg­u­la­tors sup­plant­ed the feds in polic­ing cryp­to markets

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.

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