Bitcoin Exchange Cryptsy Faces Lawsuit Over Customer Account Breach

A Florida law firm has filed a suit against digital currency exchange Cryptsy, alleging deceptive business practices.

By Stan Higgins

Oct 24, 2014 at 9:10 p.m. UTC

Updated Sep 11, 2021 at 11:16 a.m. UTC

Credit: Shutterstock

Stan Higgins

A Florida law firm is pressing charges against digital currency exchange Cryptsy, accusing the company of fraudulent business practices and negligent security measures.

In court documents filed in the 15th Judicial Court of Florida yesterday, Silver Law Firm stated that Cryptsy violated the state's Deceptive and Unfair Trade Practices Act by failing to provide critical information regarding security risks and customer fund management protocols.

Plaintiff and Cryptsy customer Skye Bonow, according to the filing, lost 140 BTC in January due to a security breach stemming from the undisclosed issues. Cryptsy has dismissed the charges in an official statement as unwarranted and driven by ulterior motives.

The court action against Cryptsy represents yet another legal battle in the digital currency space. Companies like Mt Gox, Butterfly Labs, CoinTerra and KnCMiner, among others, have all been targeted by civil or criminal suits in the past year. Silver Law is litigating a separate case against the operators of Bitcoin Savings & Trust, a bitcoin investment startup that was later shut down by US authorities when it was revealed to be a ponzi scheme.

Counsel David Silver accused Cryptsy of failing to uphold its obligations to its customers by not correctly managing their funds, saying:

“This is like the client walking into a bank on a Monday morning with a statement from the bank saying he has 150 BTC, and asking to withdraw that bitcoin, and the bank saying that someone took that money this morning and we have no responsibility for it.”

Suit alleges fraud front

The court documents state that, under Florida law, consumer-facing businesses are responsible for both providing meaningful protections if they handle funds and being transparent about any potential risks or dangers involved with using a service.

According to the suit, Cryptsy withheld information about security risks, how funds were stored and problems arising from internal development. Cryptsy was also accused of not providing details to customers about third parties that were involved with the exchange service.

The document continues:

“As a result of Defendants’ deceptive trade practices, Plaintiff was deceived into transferring bitcoin to Defendants, deceived into believing that Plaintiff’s assets were safe; and deceived into maintaining assets with Defendants when Plaintiff would have otherwise been able to protect and preserve his assets – thus causing significant economic damage to Plaintiff.”

The suit also alleges that Cryptsy intentionally misled customers by not providing this information and misrepresenting certain elements of the company. This, according to Silver, convinced customers like Bonow to use a service that they did not fully understand.

Cryptsy dismisses suit as PR stunt

In an official statement, Cryptsy said the lawsuit is without merit and that it will challenge the charges in court. The company said that Bonow’s computer was the source of the hack, meaning that there is little the exchange can do to address the stolen bitcoins.

CEO Paul Vernon said on the company blog:

“The complaint alleges that Cryptsy misled users and was negligent in security. They represent a single user. We have reviewed the unofficial complaint and believe that it is without merit. We intend to defend the case vigorously.”

The blog post included a list of security steps that customers should take prior to using the platform that can help avoid similar situations, including the use of two-factor authentication. Vernon also noted that, according to the site's terms of agreement, disputes are supposed to be settled via arbitration.

Vernon later told CoinDesk that he believes the suit’s legal representation is driven by financial motives, saying: “Our legal team tells us that they are likely just trying to get us to settle by pushing out a large PR campaign about it.”

Silver Law Complaint Against Bitcoin Exchange Cryptsy

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