The requests were in vain, victims of the scam say.
“They are trying to be a financial institution without the infrastructure to support it,” said Eric Rosen, a Roche Freedman attorney who is representing some 96 victims in the arbitration lawsuit, which is similar to a lawsuit filed against Coinbase.
“There were no procedures in place to stop these frauds,” Rosen said. “Of course, the scammers were quick to pick up on this and instructed victims to download Coinbase Wallet.”
Many of the victims lost their life savings. The lawsuit says rules requiring banks to reimburse debit card users for unauthorized transfers should also apply to Coinbase customers.
“Coinbase is committed to protecting its customers from scams, fraud, and other crimes and has invested significant resources to protect users against liquidity mining scams,” company spokeswoman Lisa Johnson said in response to the lawsuit. of arbitration. “A customer’s activities on the Coinbase Wallet, including managing the wallet’s private security keys and accessing the wallet’s contents, are controlled solely by the customer, not Coinbase,” Johnson continued, noting that The company offers many products so consumers “can choose the products that are best for them.”
Arbitration could be the beginning of a reckoning whether the crypto ideology of self-sufficiency and software-based government can survive contact with the highly regulated mainstream financial system. If the arbitration demand results in an order for Coinbase to reimburse its customers, it provides the possibility of a path forward for victims of an ongoing massive scam that The Washington Post reported in April had already caused thousands of victims. more than USD 60 million in losses. the singles participating in the Coinbase arbitration lawsuit, some of whom were scammed as of this August, say they lost more than $21 million in total.
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Many were forced by Coinbase Wallet’s terms of service to resort to arbitration rather than challenge them through the American courts. The arbitrator’s decision will not set formal legal precedent, but it will help answer one of the main questions of the burgeoning era of cryptocurrencies: Do the existing rules of the financial system apply to crypto businesses?
Unlike other scams where someone is tricked into sending money somewhere, in this scheme, individuals the money was stolen directly from their accounts. After meeting victims through social media, dating apps, or texting wrong numbers, the scammers said there were huge profits available through “liquidity mining”; a potential investor he just had to buy a “mining certificate” by clicking on a prompt in Coinbase Wallet that said “confirm payment.”
The certificate was not real and the process was not really a payment. Clicking on these innocuous-looking coupons would record a single line of computer code that would give fraudsters permission to steal cryptocurrency deposited into an account weeks or months later. Coinbase “had no procedures in place to stop these frauds,” Rosen said. “They didn’t even seem to try. Of course, the scammers were quick to pick up on this and literally directed victims to download Coinbase Wallet.”
Victims tell similar stories: the scammer spent weeks enticing them to invest more, until one day they ran out of money. A victims’ advocacy group calls it a “pig slaughter” scam in which victims’ accounts are fattened up like pigs for slaughter.
Reports from ProPublica and Vice say that at least some of the front-line scammers are victims of human trafficking in Southeast Asia, forced to work under threats of violence. This week, The director of investor protection in the state of Delaware has issued a cease and desist order against more than 15 people it believes are “involved in or working in conjunction with” those who contacted the alleged victims.
But some of those who lost money say they see the perpetrators as only part of the story.
“I blame Coinbase much more than even the scammers, because the scammers couldn’t have been effective without Coinbase,” James Osbun, who says he lost $77,000 in the scam, said in an interview.
The level of legitimacy conferred by a company like Coinbase combined with the lack of red flags kept Osbun moving forward, he said, when he otherwise would have stopped.
“At a minimum, let me know what my account is doing,” Osbun said, referring to the stealthy smart contract. ‘You are putting your funds at risk: continue? Yes or no?’ They didn’t even do that,” he added.
In recent months, Coinbase has adjusted the warnings it presents in its wallet app to now show that a website is requesting permission to withdraw a large sum of dollars from an account. (However, a wallet app within Coinbase’s main app still appears to be vulnerable; it doesn’t make it clear that signing a smart contract could allow a website to access someone’s entire balance.)
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For years, regulators paid relatively little attention to cryptocurrencies. But as its popularity among ordinary Americans soared in 2020, reports of fraud also soared, as borderless digital money became a gold rush for thieves abroad, including the South Korean government. North.
Meanwhile, state and federal regulators have taken action against some companies. The Securities and Exchange Commission has begun filing cases against certain cryptocurrency companies and promoters, saying they violated securities laws. The cryptocurrency industry has defended itself, arguing that those laws, which normally apply to stocks, should not apply to decentralized digital coins and tokens.
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Experts believe that the importance of Coinbase The case goes far beyond these victims.
“If the arbitrators find in favor of these plaintiffs, that means anyone who has lost money in a crypto scam will call a lawyer,” said Lee Reiners, director of policy at the Duke Center for Financial Economics and a fellow at Duke Law. who has investigated crypto and financial scams.