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Coinbase did not commit fraud but must face negligence suit over Bitcoin Cash launch, judge rules

Coinbase, Inc. [Public domain]

Thu, 08 Aug 2019, 03:37 am UTC

A U.S. district judge has ruled that cryptocurrency exchange Coinbase did not act fraudulently during its failed launch of Bitcoin Cash (BCH).

Based on a court order, California’s Northern District Judge Vince Chhabria dismissed claims by trader Jeffery Berk that Coinbase committed fraud by stopping trading for 3 minutes.

Coinbase was accused of insider trading, alleging that executives manipulated markets by buying up BCH based on prior knowledge of the launch plans.

Berk identified three potential lawsuits for the events that occurred in December 2017, namely, the Commodities Exchange Act, the FinCEN rules, and New York state regulations.

Even assuming Bitcoin Cash is a commodity subject to the Commodities Exchange Act, the complaint does not sufficiently explain how the launch manipulated the market for Bitcoin Cash or for Bitcoin. Nor does it plausibly or coherently describe Coinbase and Armstrong’s motive to manipulate the prices,” the court order stated.

Notably, the altcoin was only 4 months old at that time and was still gradually being adopted by major exchanges. While Coinbase was adding BCH into its platform, it caused a price increase. A subsequent decision to close the trading left sellers unable to sell at artificially high prices.

However, the judge denied the exchange’s motion to move the case to arbitration and dismiss the buyers’ negligence claims. He said that it is “plausible” that Coinbase “breached its duty to maintain a functional market.”

For starters, the fact that Coinbase halted trading within three minutes of the launch is indicative of dysfunction,” Chhabria said.

He further noted that buyers have identified precautions the company should have taken to prevent the massive BCH price spike. In addition, he pointed out that Coinbase should have announced the BCH launch more than an hour in advance to allow more buyers and sellers to place limit orders.

That way, Coinbase could have ensured the liquidity and market capitalization needed for an orderly market. Coinbase instead launched trading while only purchase orders were pending. And the buyers have alleged a plausible motive for Coinbase’s seemingly rushed decision to launch under subpar conditions,” he concluded.

The latest ruling follows after Coinbase Custody was chosen as the new custodian of the digital asset holdings of Grayscale Investments. Coinbase Custody will serve as the custodian for Grayscale’s single-asset investment products including digital currencies and publicly listed funds such as Grayscale Bitcoin Trust, Grayscale Ethereum Trust, and Grayscale Ethereum Classic Trust.

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