Coinbase, one of the largest and most well-known cryptocurrency exchanges, continues to face legal challenges and offshoots of an insider trading lawsuit related to the 2017 Bitcoin Cash (BCH) hard fork, which created a separate and competing form of the digital currency, initially valued at $500 per BCH. In the aftermath, Coinbase allegedly spent $470,000 on legal fees and other costs related to defending itself against the charges, according to recently submitted court documents.
The backstory to Coinbase’s legal woes started in August 2017, when Bitcoin, the world’s most well-known digital currency, underwent a hard fork. This event, which arises when a group of developers creates a new and separate codebase from the original software, resulted in the creation of a new cryptocurrency called Bitcoin Cash.
Bitcoin holders were supposed to receive Bitcoin Cash at a one-to-one ratio for their existing holdings, but the distribution did not go as smoothly as planned. Coinbase initially announced it would not support the hard fork, but later reversed its decision, causing much confusion and chaos in the market.
A lawsuit filed in 2018 by plaintiff and Coinbase user Jeffrey Berk accused the digital asset platform of insider trading, claiming that Coinbase employees and other insiders gained an unfair advantage by trading Bitcoin Cash ahead of news it would be listed on the platform being revealed to the public. The lawsuit cited hard evidence of an increase in trading volume and price of Bitcoin Cash hours before the news was released.
In 2019, a California district judge dismissed the lawsuit on technical grounds, citing that the plaintiff had failed to provide sufficient evidence of wrongdoing. He provided the plaintiff with 21 days to amend the lawsuit and refile.
Soon after, the plaintiff’s legal team filed an amended complaint, stating that news about the addition of Bitcoin Cash on Coinbase leaked to Coinbase’s employees and others ahead of the formal announcement. The document alleges that Coinbase employees, their associates, and the platform itself engaged in illegal trading to benefit at the expense of retail customers, which resulted in substantial profits for the insiders.
Coinbase continues to deny the allegations, claiming there is no evidence to support the accusations. The digital asset platform has even sought reimbursement of its legal expenses in the case, amounting to approximately $470,000, as part of a motion to the court.
The company’s chief executive officer, Brian Armstrong, has pledged full transparency in the matter and has stated that any employee found to have participated in wrongful trading practices would be terminated immediately.
This lawsuit and subsequent legal action have drawn significant attention to the larger issue of insider trading within the cryptocurrency industry, as well as the potential negative impact on retail investors who may be left on the sidelines.
As the industry matures, more regulatory controls and legal actions against unethical practices are expected to emerge. Greater regulation and oversight of the industry have become an increasingly pressing issue, with some well-established financial regulators stepping up their actions.
Both the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), two of the United States’ most powerful financial regulatory agencies, have been working to create regulatory frameworks that will protect investors and promote transparency.
Avoiding regulatory scrutiny should be a top priority for companies like Coinbase, as the risks of non-compliance are not just financial but also reputational. Indeed, according to the Blockchain Transparency Institute, several cryptocurrency exchanges had been subjected to legal action because of fraudulent behavior, including the operation of so-called “dark pools” where insiders can manipulate the markets and illegally profit from retail investors.
Cryptocurrency exchanges around the world must navigate a complex and evolving regulatory environment. The insider trading lawsuits that have plagued Coinbase should serve as a clear warning for other ventures in the market, whether they are seeking to build a new digital asset or create a platform for trading them.
In conclusion, the allegations and legal actions against Coinbase highlight both the potential risks and rewards for the cryptocurrency industry. As digital currencies like Bitcoin and Bitcoin Cash continue to grow in popularity, it is essential for the industry to demonstrate transparency and adherence to ethical business practices to gain the trust of retail investors and the wider financial community. Only then will the true potential of cryptocurrency be realized, providing investors with a viable and secure alternative to traditional financial assets.
