You win some, and you lose some, or so Coinbase, America’s premier and largest crypto exchange, found out in a California court. The wheels of justice seem to be taking their time, since the case revolves around the launch of Bitcoin Cash in 2017, shortly after its hard fork from Bitcoin. Various motions were filed, but the one that stuck was that Judge Vince Chhabria, a United States District Judge of the Northern District of California ruled that Coinbase must face a charge of negligence from only BCH buyers.
Hard forks and initial issuances of tokens on an exchange can be fraught with time sensitive issues that cannot be allowed to happen or the wrath of someone will be incurred. In the United States, this type of “wrath” is typically measured in dollars and cents, thereby making it also extremely easily to follow through with litigation. The process can then be quite lengthy, as discovery and the taking of depositions, not to mention a flurry of motions, wind their way through the court calendar.
The recent ruling in favor of a trader named Jeffrey Berk and other “injured parties” only means that more time in court is required. Future rulings could go either way and result in appeals, as well, unless someone either accepts the verdict or a settlement is reached between the parties to the lawsuit. A settlement will depend on the merits and whether either side wants to risk further action or pay the price to do so. For now, we are only on the 40-yard line with 60 yards to go, if a football metaphor suffices for now. The ruling is also on behalf of buyers, but the judge left the door open for sellers to file separately.
What happened? Per one report: “The problem stems from the fact that Coinbase opened trading in U.S. Dollar orders, but shortly thereafter suspended them several minutes after the start of trading. The reason for the clumsiness: “significant volatility”. Simultaneously, the prices of the cryptocurrency skyrocketed within a very short amount of time before BCH trading actually resumed on the Coinbase platform. As a result, the general opinion was that there was an insider scheme taking place.”
To complicate matters, the Chicago Mercantile Exchange (CME) had already begun issuing futures contracts for BCH a day earlier. These contracts did not require deposits of BCH “in kind”, nor did they “physically settle” in BCH. The CME’s futures program settled in cash, but a market was established just the same. BCH was already four months old, however, and traded on other exchanges, but Coinbase’s entry in the market supposedly produced a spike in its price.
The plaintiff had filed charges for fraud, unjust competition, and price manipulation, but the judge ruled against all of these motions, including one that asked for mediation in the case. The judge did find that the crypto exchange had exhibited “incompetence born of haste” and therefore found Coinbase guilty of incompetence. Buyers can now move ahead on this basis. Brian Armstrong, the CEO of Coinbase, and David Farmer, head of product, were both absolved from charges of fraud. Other comments from the judge were as follows:
- “For starters, the fact that Coinbase halted trading within three minutes of the launch is indicative of dysfunction.”
- “Even assuming Bitcoin Cash is a commodity subject the Commodities Exchange Act, the complaint does not sufficiently explain how the launch manipulated the market for Bitcoin Cash or for Bitcoin. Nor does it plausibly or coherently describe Coinbase and Armstrong’s motive to manipulate the prices.”
- “Moreover, while factual allegations paint a compelling picture of an incompetent launch by Coinbase, the complaint does not outline a coherent account of fraud by Coinbase, Armstrong, and Farmer.”
- “The interpretation that the California Supreme Court would be most likely to adopt is that Coinbase indeed had a duty to maintain a functional marketplace.”
And so the wheels of justice turn another notch. More discovery and motions will surely follow in future. Stay tuned.