Lawyers at Israels & Neuman PLC Help to Recover Funds Stolen from Coinbase Accounts

Coinbase Under Fire: Regulatory Investigations, Hacks, and Legal Action

Coinbase, one of the largest cryptocurrency exchanges in the world, has come under intense scrutiny from regulators and customers. Despite its promise of ‘bank-level’ security and an intuitive user interface, the platform has been the target of numerous high-profile hacks, compliance failures, and ongoing litigation. This post provides a comprehensive overview of Coinbase’s growing legal and regulatory challenges and what customers can do if their assets were stolen or compromised.

Regulatory Investigations and Penalties

Coinbase’s compliance issues have led to multiple investigations and enforcement actions:

– January 2023: The New York State Department of Financial Services imposed a $100 million penalty for anti-money laundering (AML) and Know Your Customer (KYC) violations.  Specifically, Coinbase was fined $50 Million by New York DFS for Compliance Failures and ordered to investment $50 Million More in Compliance Overhaul.  New York Superintendent of Financial Services Adrienne A. Harris announced that These failures violated New York Banking Law and several DFS regulations, including those governing virtual currencies, money transmission, cybersecurity, and anti-money laundering.

Key Findings:

• Coinbase’s compliance program was immature and inadequate, particularly in its Know Your Customer (KYC) and Customer Due Diligence (CDD) practices.
• The company treated onboarding as a “check-the-box” exercise, failing to adequately vet customers.
• Coinbase’s Transaction Monitoring System (TMS) failed to keep up with alert volume, resulting in a backlog of over 100,000 unreviewed alerts by late 2021.
• The firm frequently failed to investigate and report suspicious activity in a timely manner, with multiple Suspicious Activity Reports (SARs) filed months late.
• DFS found Coinbase’s system to be vulnerable to serious criminal activity including fraud, money laundering, child exploitation-related activity, and narcotics trafficking.

Regulatory Action:

• An Independent Monitor was installed in early 2022 to address the urgent compliance failures.
• Coinbase has agreed to invest an additional $50 million into improving its compliance program over the next two years.
• The Independent Monitor’s term has been extended by at least one more year, at DFS’s discretion.

Significance:

Superintendent Harris emphasized that crypto companies are held to the same high standards as traditional financial institutions, particularly in protecting consumers, ensuring cybersecurity, and preventing financial crimes.

– June 2023: In June 2023, the New Jersey Bureau of Securities issued a Summary Cease and Desist Order against Coinbase, alleging that its crypto staking offerings constituted unregistered securities sold to residents. The Bureau imposed a $5 million penalty, asserting that Coinbase failed to provide necessary disclosures to investors. The action is part of a broader multi-state initiative to regulate crypto staking products and ensure compliance with securities laws.

– January 2023: In January 2023, the Dutch central bank (DNB) fined Coinbase €3.3 million (approximately $3.6 million) for operating in the Netherlands without proper registration under anti-money laundering regulations. The DNB noted that Coinbase’s non-compliance spanned from at least November 2020 to August 2022, during which the company gained a competitive advantage by avoiding supervisory fees. Coinbase has since registered and is considering appealing the fine.

Widespread Hacks and User Losses

Coinbase has experienced several high-profile hacks, with incidents including SIM-swapping, phishing attacks, social engineering, and malware breaches. Notable examples include:

– March and May 2021: Between March and May 2021, Coinbase experienced a security breach where unauthorized third parties accessed the accounts of over 6,000 customers. Attackers exploited a flaw in Coinbase’s SMS-based two-factor authentication system to gain access and transfer funds out of customer accounts. Coinbase addressed the vulnerability, enhanced its security measures, and reimbursed affected users for their losses.

– May 2022: A user reportedly lost $96,000 through a SIM-swap hack.  In March 2023, a Coinbase user, Jared Ferguson, filed a lawsuit against the exchange after losing $96,000 from his account due to a SIM-swap attack. Ferguson alleges that Coinbase failed to assist him in recovering the stolen funds, despite promptly reporting the incident. Coinbase responded by stating that users are responsible for the security of their devices and credentials, including two-factor authentication codes. The lawsuit claims that Coinbase violated state laws by not reimbursing the lost funds.

– February 2023: In February 2023, Coinbase disclosed that the hacking group known as “0ktapus” targeted its employees in a phishing campaign. The attackers sent deceptive SMS messages to employees, leading one to divulge login credentials. Although the hackers accessed limited internal tools and viewed some employee information, Coinbase’s multi-factor authentication prevented further intrusion, and no customer data or funds were compromised.

Coinbase’s Procedural Roadblocks: Arbitration Clauses

Coinbase’s user agreement requires that all disputes be resolved through binding arbitration administered by the American Arbitration Association (AAA). Users must first file a formal complaint through Coinbase’s internal dispute portal and wait 45 business days or receive a response before initiating arbitration. This clause has been upheld by courts, leaving affected customers with little choice but to pursue recovery through arbitration.

An article discussing Coinbase’s new arbitration agreement can be found HERE.

Common Legal Claims Against Coinbase

Victims of Coinbase account hacks and compliance failures may be able to pursue claims based on:

– Negligence (failure to provide adequate cybersecurity measures)
– Breach of contract (violations of the user agreement)
– Violations of state and federal data privacy and securities laws
– Breach of fiduciary duty or consumer protection statutes

Israels & Neuman, PLC is accepting cases on a contingency fee basis, particularly for victims who lost substantial amounts in unauthorized transactions. Claims can include requests for reimbursement of stolen funds, damages related to identity theft, and other consequential losses. No fees are paid by you unless we successfully recover money.

Steps to Take If You’ve Been Hacked

If you believe your Coinbase account has been compromised:

1. Immediately notify Coinbase.
2. Gather evidence, including IP addresses, wallet addresses, and details from your mobile carrier if SIM-swapping is suspected.
3. Do NOT contact Coinbase’s legal team without first consulting a qualified cryptocurrency attorney.
4. Prepare for arbitration, including complying with pre-dispute steps outlined in the user agreement.
5. Contact an experienced attorney at Israels & Neuman who understands cryptocurrency law, data breaches, and regulatory procedures.

Aaron Israels Helps Victims of Coinbase Account Hacks

Israels & Neuman, PLC represents investors and consumers who have lost funds on cryptocurrency exchanges like Coinbase due to hacking, fraud, or compliance failures. If your digital assets were stolen, we may be able to help you pursue recovery through arbitration or litigation.

Contact us today at (720) 599-3505 or (206) 795-5798 to schedule a free consultation and learn more about your rights.

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The content posted on this site represents the opinions of the author and should not be interpreted as statements of fact. No findings or legal conclusions have been made against any of the firms or individuals mentioned herein. This blog is provided for educational and informational purposes only and draws upon publicly available information from the internet. It is intended to offer a general understanding of legal topics and should not be considered legal advice.

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