US court rules in favor of Coinbase in BTC Gold row

A U.S. Court of Appeal has confirmed an earlier judgment in favor on Coinbase (NASDAQ: COIN) in Darrell Archer’s suit against the digital currency exchange for not letting him use Bitcoin Gold on their platform.

Archer brought the suit after the BTC Gold (BTG) fork in 2017. Archer had 350 Bitcoin in a Coinbase account at the time of the fork, which would carry over to the new currency if BTG ended up being supported by Coinbase. It wasn’t.

Coinbase told its customers that the security risk created by the BTG developers not making the source code public was too great—which turned out to be well founded, as the network was hacked the very next year resulting in the theft of millions of dollars worth of the currency from users and trading platforms hosting the currency.

The trial judge granted an application for summary judgment made by Coinbase on the basis that Archer had failed to show any triable issue on any material fact of the case. Archer appealed, and this week that appeal was rejected, leaving Archer’s suit dead in the water.

The position taken by the Courts in this case is important because it shows the attitude of the Court in relation to exchanges like Coinbase, the role they play in protecting digital asset investors and the responsibilities they owe to their users.

Archer’s claim was based on three causes of action: breach of contract, conversion and negligence.

Regarding breach of contract, Archer alleged in his complaint that in opening an account on Coinbase, he had established a contract between himself and the exchange, which was breached by their refusal to allow the plaintiff to properly deposit his forked BTG to his account. Archer conceded that the breach comes not from a written agreement, but from Coinbase ‘holding itself out’ as an exchange that would provide ‘usual and customary’ services.

The second basis for Archer’s claim was conversion—that Coinbase had committed a wrongful act which interfered with Archer’s possession of his property, meaning BTG. Archer tried to argue that the ‘wrongful act’ here was in fact an omission on the part of Coinbase in taking no action to support the new asset and therefore depriving him of control over his property.

The last of the claims in Archer’s suit was for negligence. This is closely tied to the reasoning behind his conversion claim: that Coinbase owed Archer a legal duty to support BTG and negligently failed to do so.

The appellate court rejected Archer’s arguments and granted Coinbase’s application for summary judgment for the same reasons given by the trial judge.

Of the breach of contract claim, the Court said it could find no grounds which established a contract between Coinbase and Archer which would require that Coinbase provides BTG to him. In fact, all the representations made by Coinbase relating to BTG were that it was not a secure network and as such it would not support it.

They rejected the conversion claim because there was no positive act on the part of Coinbase to deprive Archer of his property—merely declining to support BTG on its platform could not amount to a conversion.

The negligence claim was rejected for similar reasons.

While it seems that Archer’s case was always doomed, the judgment provides good authority on the Court’s view on the role of exchanges like Coinbase within the ecosystem. For them to accept Archer’s reasoning would have meant imposing a duty on all exchanges to support all new digital assets at all times, regardless of safety features.

This would have been an untenable state of affairs given the deluge of poorly conceived, developed and managed digital assets that come and go, and expose exchanges to claims for breach of contract over the mere fact that they do not support, for example, a hardly-known sham currency with little to no security protections. It would remove the ability of legitimate exchanges to vet and curate the assets they support, and in doing so would remove an important control which ultimately protects investors in a world where few exist and seemingly more suspect coins attempt to enter the market each week.