Crypto Exchange Coinbase Faces Class Action Lawsuit Over Alleged Lapses in Security

A class action lawsuit filed in a federal court in Georgia alleges the crypto exchange failed to secure users' accounts against theft and hacks, and seeks damages upwards of $5 million.

AccessTimeIconAug 23, 2022 at 8:02 a.m. UTC
Updated Aug 23, 2022 at 6:38 p.m. UTC

Sandali Handagama is a CoinDesk reporter with a focus on crypto regulation and policy. She does not own any crypto.

Coinbase (COIN) failed to properly secure customers' accounts, leaving them vulnerable to theft and unauthorized transfers, a putative class action lawsuit filed against the crypto exchange last week alleges.

The complaint, filed in the U.S. District Court for the Northern District of Georgia, also accuses the company of causing financial harm to users by locking them out of their accounts permanently or for long periods of time, as well as violating federal law by listing securities on its trading platform.

Coinbase, which last year became the first cryptocurrency exchange to go public in the U.S., is facing a string of lawsuits from unhappy investors. In addition to another aspiring class action lawsuit filed in New Jersey alleging the company allowed U.S. persons to trade unregistered securities, earlier this month, a Coinbase shareholder accused the company of misleading investors about last year's public listing. The platform is also trying to settle two separate lawsuits filed by investors through arbitration.

The Georgia lawsuit represents a class of more than 100 people, including lead plaintiff and Georgia resident George Kattula, though Kattula's attorneys say there may be more victims.

“We are aware of a large number of fraudulent transactions in the accounts of Coinbase customers," said John Herman of Herman Jones LLC, the Georgia-based law firm representing Kattula, in an emailed statement to CoinDesk. "We are encouraging all Coinbase account holders to review their accounts carefully and advise us promptly of any irregular activity."

The lawsuit details some of these alleged issues, citing a 2019 incident in which the exchange reportedly took over six months to let a customer back into their own account, a pattern the suit alleges the company repeated.

Coinbase first requires customers to use its support team, and if the issue is not resolved that way, customers then have to go through the "Formal Complaint Process," the complaint said.

"If that fails to resolve the customer’s dispute, only then can customers attempt to resolve disputes through arbitration. But Coinbase systemically fails to follow those pre-arbitration dispute resolution mechanisms as set forth in the User Agreement, thereby rendering the provision, including its delegation provision, void ...," the filing said.

Moreover, the suit alleges that some of the assets listed on Coinbase match the U.S. Securities and Exchange Commission's (SEC) definition of a security, and the company itself may be an "exchange" under federal law, meaning it would have to register with the regulator.

The lawsuits began piling up this year after the SEC said it was investigating Coinbase over the alleged sale of crypto securities in July.

“Coinbase’s user growth has outpaced its ability to provide the account services and protections it promises to consumers,” Kattula's complaint said.

The suit alleges Coinbase’s failure to "establish and maintain adequate cybersecurity measures" caused investors to lose their "wallet and account access, the assets and investments in those accounts" as well as "sensitive personally identifiable information stored in their Coinbase accounts, and, among other things, their investment opportunities."

Kattula's suit is seeking damages exceeding $5 million (excluding his legal costs and fees), a binding judgement, and injunctive relief, which is an order to prohibit involved parties from carrying out certain activities.

Coinbase did not respond to a request for comment by press time.

Nikhilesh De contributed reporting.

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Sandali Handagama is a CoinDesk reporter with a focus on crypto regulation and policy. She does not own any crypto.

CoinDesk - Unknown

Sandali Handagama is a CoinDesk reporter with a focus on crypto regulation and policy. She does not own any crypto.

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