Crypto fraud victim’s case against Coinbase faces tough odds
Jared Ferguson is one of the latest cryptocurrency scam victims to take his online crypto broker to court. And while his case raises new legal arguments, it is destined to face obstacles that have slowed other victims’ success in recovering stolen funds.
On Monday, Ferguson filed a federal lawsuit accusing Coinbase ( COIN ) of willfully ignoring what he alleges were telltale signs of fraud, following an unauthorized mobile SIM swap that hackers used to drain his $96,000 account.
The case is unique in the nascent field of cryptocurrency law in that it attacks Coinbase on theories of equity, and not just negligence, Max Dilendorf, a lawyer who represents victims of crypto fraud, told Yahoo Finance.
Nevertheless, the path to raising the funds is narrow at best.
The first hurdle for Ferguson, like most victims of crypto scams, is the mandatory arbitration clause built into his user agreement.
Coinbase’s user agreement states that any customer dispute relating to a customer’s access to, or use of, the Services must be resolved through binding arbitration, rather than in court. The terms, and terms like it, have led judges to push lawsuits alleging fraudulent transfers out of the court system.
“A judge will ask,” came the claim [Ferguson’s] use of the platform, or not?'” Dilendorf explained. If so, the matter can only be resolved in arbitration pursuant to Coinbase’s user agreement.
“It is very difficult to set aside these clauses unless they are found unconscionable,” Dilendorf said.
Ferguson’s claims attempt to circumvent that rule.
Ferguson says the company violated the Electronic Funds Transfer Act (EFTA) — a federal law meant to secure electronic money transfers — as well as California’s Uniform Commercial Code by denying his request to refund stolen funds without first informing him of his right to access to the documents. it used to come to its decision.
EFTA, enacted in 1978, offers consumers protection from liability for fraudulent online bank transfers and fraudulent credit and debit card transactions. Cardholder losses are limited to $50 for those who notify their credit card issuer within two business days of becoming aware of the fraud.
Ferguson also argues that Coinbase violated California law by failing to fully investigate his transactions and by failing to establish reasonable security procedures.
Specifically, Ferguson alleges that Coinbase engaged in “willful blindness” by discounting the uncharacteristic nature of the fraudulent withdrawals given his account’s history, and that the transfers were initiated from a new device, with a new IP address, and immediately following a reset of password. He adds that Coinbase processed the transfer without requiring facial recognition, which had been enabled on the account before the attack.
“Coinbase’s security procedure fails to flag and hold obviously fraudulent and unauthorized transactions … Any commercially reasonable policy would have considered this combination of troubling factors, flagged the transactions as suspicious, and held or rejected the transactions as likely to be fraudulent,” it said the complaint. . “Once [Ferguson] notified Coinbase that his phone was compromised, Coinbase had an obligation to cancel the transfers and freeze the account to prevent further unauthorized charges.”
In response to the lawsuit, a Coinbase spokesperson described the company’s security team as a “world-class” group that takes “extensive security measures” to ensure the safety of customers’ accounts.
“We educate our customers on how to avoid cryptocurrency scams and report known scams to relevant law enforcement authorities. Coinbase customers can take additional steps to secure their accounts by taking advantage of these tips that we’ve published in our Help Center,” the company said in an email to Yahoo Finance.
Regardless of where the dispute is settled, Dilendorf said Ferguson faces the added hurdles of the expense and time needed to litigate complex legal theories as they develop. And in arbitration, crypto platforms have the luxury of handing over fewer of the documents that might help a victim’s case, hiding settlements from public view.
“How can you build a case without seeing the documents?” he asked. – This would be a complicated matter.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
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