Cryptsy Class Action Settlement Against Coinbase Exchange Revisited by Judge

A judge in the U.S. District Court for the Southern District of Florida has reopened a case involving Coinbase and the now-defunct exchange service Cryptsy.

The Story So Far

Paul Vernon opened an exchange in Delray called Cryptsy that claimed to offer fiat-to-crypto exchange services. Underneath the surface, however, Cryptsy had not built the infrastructure or obtained the necessary licenses, to directly facilitate crypto to fiat conversions.

Instead, Cryptsy opened accounts with Coinbase to convert Cryptsy’s customer’s fiat into crypto. Cryptsy entered into a contractual relationship with Coinbase, agreeing to arbitrate all claims “arising under” the contract.

In January 2015, Vernon reportedly stole more than $8 million from Cryptsy’s users and fled to China. He allegedly laundered the stolen funds through Cryptsy’s and Vernon’s accounts on Coinbase.

After Vernon fled the country, Leidel and a court-appointed receiver brought a class action suit against Coinbase for failing to adequately monitor, detect, and report Vernon’s theft.

The class obtained a default judgment against the financially defunct Cryptsy for $8.2 million, and brought tort claims against Coinbase, the only deep pocket left, alleging that Coinbase violated duties owed to Cryptsy’s customers under the federal and common law, including the Bank Secrecy Act. In sum, the Crypsty class alleged that Coinbase negligently failed to ask any questions when Cryptsy executed anomalously large trades.

The District Court rejected Coinbase’s motion to compel arbitration on the ground that the class was not asserting any rights or benefits under Cryptsy’s agreement with Coinbase, but were instead asserting rights owed to the class independent of the contract containing the arbitration provision, namely, rights owed under federal law irrespective of the contractual relationship.

Implications Of The Case

Companies that provide customers with the ability to settle crypto transactions in U.S. dollars face the challenge of complying with a gauntlet of federal and state regulations. To further complicate matters, money services like Coinbase may also owe duties to account holders or their beneficiaries that arise under federal and state regulations unrelated to company’s contractual relationship with its account holders.

Leidel suggests that plaintiffs could focus on alleging duties owed to third parties and the public, rather than contractual duties only owed between the parties in privity. For defendants like Coinbase, the decision suggests, but does not answer, that a more broadly-worded arbitration agreement may withstand scrutiny, but a possible, though less likely, reading of the case could involve a potential retreat from the longstanding federal policy of strongly favoring arbitration clauses, at least where non contractual rights are involved.

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