Over the past year, thousands of people have lost tens, if not hundreds, of millions in cryptocurrency as gangs of sophisticated fraudsters siphoned their money out of their accounts, which are managed by an app from publicly traded cryptocurrency giant Coinbase.
Victims of crypto fraud seek to hold Coinbase accountable for losses
The requests were of no use, say fraud victims.
“They’re trying to be a financial institution without the infrastructure to back it up,” said Eric Rosen, an attorney at Roche Freedman who represents about 96 victims in the arbitration, which is related to a lawsuit, filed against Coinbase.
“There were no procedures in place to stop these scams,” Rosen said. “Of course, fraudsters quickly picked up on this, directing victims to download Coinbase Wallet.”
Many of the victims lost their savings. The claim says the rules requiring banks to reimburse debit card users for unauthorized transfers should also apply to Coinbase’s customers.
Coinbase did not immediately respond to a request for comment on the arbitration claim. Earlier this year, the company said it was working with law enforcement and regulators to prevent fraud.
The arbitration may be the start of a settlement whether crypto’s ideology of self-reliance and software-driven governance can survive contact with the heavily regulated mainstream financial system. If the arbitration demand results in an order that Coinbase refund its customers, it opens up a way forward for victims of a massive ongoing fraud that The Washington Post reported in April had already cost thousands of victims more than $60 million in losses. The individuals participating in the Coinbase Arbitration Claim, some of them were defrauded as recently as August, saying they lost more than $21 million in total.
Many were forced by Coinbase Wallet’s Terms of Service to turn to arbitration instead of challenging them through the American courts. The decision of the arbitrator will not set a formal legal precedent, but will help answer one of the most important questions in the emerging crypto era: Do the existing rules of the financial system apply to cryptocurrency companies?
Unlike other scams where someone is tricked into sending money somewhere, in this scheme, money was stolen right out of their accounts. After meeting victims through social media, dating apps or texts with the wrong number, the scammers said high returns were available through “liquidity extraction”; a potential investor just had to buy a “mining certificate”, by clicking through a message in Coinbase Wallet that said “confirm payment.”
The certificate was not genuine and the process was not really a payment. Clicking on these harmless coupons will record a single line of computer code that gives the scammers permission to steal crypto deposited into an account weeks or months later. Coinbase “had no procedures in place to stop these scams,” Rosen said. “They didn’t even seem to try. Of course, scammers quickly picked up on this and literally tricked victims into downloading the Coinbase Wallet.”
Victims tell similar stories: The scammer would spend weeks egging them to invest more, until one day their money was gone. An advocacy group for victims calls it a pig slaughter scam in which victims’ accounts are fattened as pigs for slaughter.
Reports from ProPublica and Vice say at least some of the front-line fraudsters are themselves victims of human trafficking in Southeast Asia, forced to work under threats of violence. This week, The state of Delaware’s director of investor protection issued a cease-and-desist order against more than 15 people it believes are “involved or working with” those who contacted alleged victims.
But some of those who lost money say they see the perpetrators as just part of the story.
“I blame Coinbase far more than even the scammers, because the scammers couldn’t be effective without Coinbase,” James Osbun, who says he lost $77,000 to the scam, said in an interview.
The level of legitimacy provided by a company like Coinbase combined with a lack of red flags led Osbun to continue, he said, when he otherwise would have stopped.
“At least let me know what my account is doing,” Osbun said, referring to the stealth smart contract. “You’re putting your money at risk: continue? Yes or no?’ They didn’t even do that, he added.
Over the past few months, Coinbase has adjusted the warnings it presents in its wallet app, now showing that a website is asking for permission to withdraw a huge sum of dollars from an account. (However, a wallet application inside Coinbase’s main app still appears to be vulnerable; it doesn’t make clear that signing a smart contract can give a site access to someone’s entire balance.)
For years, regulators paid relatively little attention to crypto. But as its popularity among ordinary Americans skyrocketed in 2020, so did allegations of fraud, as borderless digital money turned into a gold rush for foreign thieves, including the North Korean government.
Meanwhile, state and federal regulators have taken action against some firms. The Securities and Exchange Commission has begun pursuing cases against certain cryptocurrency companies and promoters, saying they violated securities laws. The cryptocurrency industry has fought back and argued that these laws, which normally apply to stocks, should not be applied to decentralized digital currencies and tokens.
Experts believe the importance of Coinbase the case goes far beyond these victims.
“If arbitrators find for these plaintiffs, it means that anyone who has lost money in a crypto scam is going to call a lawyer,” said Lee Reiners, director of policy at the Duke Financial Economics Center and a fellow at Duke Law who has researched crypto and financial fraud.
