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The San Francisco-based crypto exchange Coinbase may be out of the fraud loop but it, however, isn’t completely out of the woods yet. Judge Vince Chhabria of the California District Court ruled against the plaintiff’s charges of fraud and unfair competition against Coinbase but also denied its arbitration motion saying the digital asset exchange had a duty to the market but instead it “breached its duty to maintain a functional market.”
According to the plaintiff, Jeffery Berk, Coinbase wasn’t acting in good faith when it launched Bitcoin Cash on the trading platform just at the peak of the crypto hay day and stopped trading almost immediately, just several minutes after it was opened for orders. Saying Coinbase capitalized on the young market to inflate the price while depriving sellers the ability to sell at the same high price is not so far from the truth – according to the charges.
You will recall that when Coinbase listed Bitcoin Cash in 2017, it caused an inflation in the price. However, the listing lasted for only a few minutes – approximately 3 minutes. This little window was big enough to attract a ton of sellers and closed just before sellers were able to sell their BCH holdings, depriving sellers the opportunity to gain from the high price.
A number of accusations like this have come up over time, but they have been dismissed as many times as they have been filed. In fact, two different law firms were hired to investigate insider trading in the cryptocurrency exchange last year and both came out with a clean sword. Driving the conclusion that the exchange may be innocent after all.
Despite dismissing the case for lack of causation, the judge refused to sanction Coinbase, and move to arbitration because it had a responsibility to maintain the market. And halting trading almost immediately shows there was a dysfunction.
There are several measures the crypto exchange could have put in place to maintain the market. The judge argued:
“The buyers have also identified precautions Coinbase could have taken to avert the massive spike in the price of Bitcoin Cash on its exchange. Most prominently, Coinbase could have announced its launch of trading in Bitcoin Cash more than an hour in advance, which would have permitted 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.”
Due to this clause, Coinbase may be cleared of fraud charges but also have a window to be sued for botching its BCH listing.