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Victims of Crypto Scams Try to Hold Coinbase Accountable for Losses

In the past year, thousands of people have lost tens, if not hundreds of millions in cryptocurrency when gangs of sophisticated scammers withdrew their funds from their accounts managed by an app from listed cryptocurrency giant Coinbase.

Now those victims are fighting back. Nearly 100 people trying to hold Coinbase accountable, saying the company has not done enough to protect them. Scam victims say they notified the company and begged it to fix flaws in the Coinbase Wallet software that allowed the victims to unknowingly allow the scammers access to their accounts.

The requests were in vain, scammers say.

“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 claim, which resembles a lawsuit filed against Coinbase.

“There were no procedures to stop this fraud,” Rosen said. “Of course, scammers quickly picked up on this and instructed victims to download the Coinbase wallet.”

Many of the victims lost their savings. The requirement 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 is working with law enforcement and regulators to prevent scams.

The arbitration may be the beginning of a settlement whether cryptocurrencies’ ideology of self-reliance and software-driven governance can survive contact with the highly regulated mainstream financial system. If the arbitration claim results in an order that Coinbase refunds to its customers, it could provide an opportunity for victims of a massive ongoing scam that The Washington Post reported in April that thousands of victims had already suffered more than $60 million in losses. . the individuals participate in Coinbase’s arbitration requirement, some of them were only scammed in August, saying they lost more than $21 million in total.

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Many were forced by Coinbase Wallet’s terms of service to turn to arbitration instead of suing them the US courts. The arbitrator’s decision will not set a formal legal precedent, but will help answer one of the key questions of the nascent 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, this scheme uses the money was stolen directly from their accounts. After meeting the victims via social media, dating apps or texting with the wrong number, the scammers said high returns were available through “liquidity mining”; a potential investor just had to buy a “mining certificate”, by clicking on a prompt in Coinbase Wallet that says “confirm payment”.

The certificate wasn’t real, and the process wasn’t really a payment. Clicking on these innocuous-looking vouchers registers a single line of computer code that gives the scammers permission to steal crypto that is deposited into an account weeks or months later. Coinbase “had no procedures to stop this fraud,” Rosen said. “They didn’t even seem to try. Of course, scammers quickly picked up on this and literally instructed victims to download the Coinbase wallet.

The victims tell similar stories: the scammer would urge them to invest more for weeks, until one day they ran out of money. A victim advocacy group calls it a “pig slaughter” scam where victims’ accounts are fattened up like pigs for slaughter.

Reports from ProPublica and Vice say at least some of the frontline scammers are themselves victims of human trafficking in Southeast Asia, forced to work under threat of violence. This week, The Delaware director of investor protection has banned more than 15 people he says are “involved with or cooperating with” those who have contacted alleged victims.

But some of those who have lost money say they see the perpetrators as only part of the story.

“I blame Coinbase a lot more than even the scammers because the scammers wouldn’t have been effective without Coinbase,” James Osbun, who says he lost $77,000 to the scam, said in an interview.

The level of legitimacy afforded by a company like Coinbase coupled with a lack of red flags kept Osbun going, he said, when he would have quit otherwise.

“At least let me know what my account is doing,” Osbun said, referring to the stealth smart contract. ‘You’re putting your money on the line: continue? Yes or no?’ They haven’t even done that,” he added.

In recent months, Coinbase has tweaked the alerts in its wallet app, which now shows that a website is requesting permission to withdraw a huge sum of dollars from an account. (A wallet application in Coinbase’s main app still seems vulnerable, though; it doesn’t make it clear that signing a smart contract can give a website access to one’s entire balance.)

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Regulators paid relatively little attention to crypto for years. But as popularity among ordinary Americans skyrocketed in 2020, so did claims of fraud, as borderless digital money turned into a gold rush for overseas thieves, including the government of North Korea.

Meanwhile, state and federal regulators have taken action against some companies. The Securities and Exchange Commission has started pursuing cases against certain cryptocurrency companies and promoters, who say they have violated securities laws. The cryptocurrency industry has fought back, arguing that those laws, which normally apply to stocks, should not be applied to decentralized digital currencies and tokens.

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Experts think the significance of the Coinbase case goes way beyond these victims.

“If arbitrators find these plaintiffs, it means anyone who has lost money in a crypto scam will call an attorney,” said Lee Reiners, policy director at the Duke Financial Economics Center and a fellow at Duke Law covering crypto and financial scams.

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