California Court Rejects Lawsuit Against Coinbase for Failure to Provide Bitcoin Gold After Bitcoin Hard Fork
August 31, 2020
In just over a decade, cryptocurrencies and blockchain have grown from a niche area of interest to a major area of economic activity. Cryptocurrencies like Bitcoin and Ethereum may serve as a medium of exchange, or they can be bought and sold in a manner somewhat like commodities trading. And the blockchain technology itself provides substantial opportunities to improve how people throughout the world function. This technology creates the opportunity for new platforms of decentralized trust. Anyone with the technological know-how can create a blockchain or cryptocurrency, and there are now thousands in existence.
Many legal issues surrounding cryptocurrency remain unresolved, including the legal obligations of cryptocurrency exchanges to their customers.
A decision issued in August 2020 by the California Court of Appeals for the First Appellate District, Archer v. Coinbase, Inc., addresses claims for breach of contract, conversion, and negligence arising from a cryptocurrency “fork.” The court found that the defendant owed no contractual or legal duties to the plaintiff relating to the forked cryptocurrency.
The Contract Between the Plaintiff and the Defendant
The defendant operates a well-known online cryptocurrency exchange called Coinbase. Users can buy and sell various cryptocurrencies through Coinbase’s platform, and they can store cryptocurrencies in a digital wallet. According to the court’s ruling, the plaintiff opened accounts in February 2014 and April 2015. Each time, he signed a User Agreement (UA) with the defendant. The court does not describe the UA’s terms, but it does address terms that are not contained in the UA.
The Cryptocurrency Fork
The plaintiff’s digital wallet with the defendant contained 350 Bitcoin on October 23, 2017. On the following day, a “hard fork” of Bitcoin created a new cryptocurrency known as Bitcoin Gold. A hard fork occurs when the users or developers of a cryptocurrency change something in the software that makes new transactions incompatible with earlier transactions. Older versions of the cryptocurrency will not process transactions using the new protocols. If older versions are not upgraded, this can result in the creation of a new cryptocurrency that exists alongside the old cryptocurrency. This was the case with Bitcoin and Bitcoin Gold.
If a hard fork creates a new cryptocurrency, owners of the old cryptocurrency may end up with a matching amount of the new cryptocurrency. This does not necessarily mean that the value of their cryptocurrency holdings doubles. A person who owns 100 Bitcoin might find themselves also owning 100 Bitcoin Gold, but these might not be worth the same.
The court does not state whether the plaintiff owned an equal amount of Bitcoin and Bitcoin Gold after the fork. It only states that he owned both types of cryptocurrency.
After evaluating Bitcoin Gold’s network, Coinbase determined that it posed a “major security risk.” It notified its customers that “it would not support the new currency.”
The Cryptocurrency Hack
The court notes that hackers breached Bitcoin Gold in 2018, resulting in the loss of “millions of dollars of funds” from the cryptocurrency’s network. The court does not say if the plaintiff lost anything. The breach occurred in May 2018, two months after the plaintiff filed his lawsuit.
The Lawsuit and the Judgment
The plaintiff’s lawsuit “alleg[ed] various causes of action” related to the defendant’s “failure and refusal to allow him to receive his forked Bitcoin Gold currency,” as well as its “retention of control over plaintiff's Bitcoin Gold for its own benefit.” After the trial court sustained a demurrer by the defendant, three causes of action remained: breach of contract, conversion, and negligence. The trial court granted summary judgment for the defendant on all three claims. The plaintiff appealed, and the appellate court affirmed the trial court’s order.
Breach of Contract
The UA between the plaintiff and the Coinbase did not require Coinbase “to provide support or services related to any particular digital currency created by a third party.” Coinbase was therefore within its rights under the contract to refuse to provide support for Bitcoin Gold.
The plaintiff did not dispute that the contract did not establish a specific duty to support Bitcoin Gold. Instead, he argued that a contractual obligation derived from “the usual and customary services” for a cryptocurrency exchange. The court rejected this argument. It held that without direct evidence of a contractual obligation, the defendant could not be liable for breach of contract.
Conversion is the civil tort equivalent of theft. A claim of conversion requires evidence that a defendant took “some affirmative action to exercise dominion over or deprive a plaintiff of his or her property.” Here, Coinbase simply did nothing to make the plaintiff’s Bitcoin Gold available to him.
The court noted that nothing requires “investors [to] keep their coins in exchanges; they can always withdraw the coins to their own private wallet.” Since the defendant had no obligation under the contract to provide support for Bitcoin Gold, the court found that it had no obligation to make the plaintiff’s Bitcoin Gold available to him in his account.
A claim of negligence requires proof that a defendant owed a legal duty of care to the plaintiff, and that they breached that duty. The plaintiff based his negligence claim on his allegation that the defendant breached its contractual obligations. The court found that, in general terms, a contractual obligation is not the same as a legal duty of care. More specifically, it found that since no contractual obligation existed in this context, no duty of care existed either.