Can I Sue Bitcoin Buying or Selling Apps?

You may be able to seek legal relief from a cryptocurrency exchange like Coinbase, but probably not in a regular court. When you create an account on a crypto exchange, you agree to the terms in its user agreement. Coinbase's user agreement requires you to either pursue out-of-court relief through a process called arbitration or file your lawsuit in small claims court.

Bringing legal action in either arbitration or court is an involved and complicated process. An experienced securities attorney would be able to provide you with legal advice about the validity of your claim, gather the evidence you need to prove it, and represent you if you choose to pursue arbitration.

What Is Cryptocurrency?

A cryptocurrency is a form of digital money that uses cryptography to secure transactions. Cryptocurrency does not rely on an issuing authority like a government or a financial intermediary like a bank; it is a peer-to-peer system that can allow anyone anywhere to send and receive payments. It is often used to purchase non-fungible tokens (NFTs).

When you transfer cryptocurrency, the transaction is recorded in a digital list of open-source computer code called a blockchain. Transactions in a blockchain are verified by the public, but the participants in the transactions are private. Cryptocurrency is stored in digital wallets that are accessible to the owner through a secure private key.

The first cryptocurrency, Bitcoin, was launched in 2009; since then, there have been nearly 20,000 issued. The most popular, Bitcoin, Ethereum, Litecoin, and Dogecoin, are part of a cryptocurrency market valued at nearly $1 trillion, with the value having taken a sharp decline since the pandemic. Although a growing number of institutions and retailers are accepting cryptocurrency as payment, most people hold it as an investment, hoping that its value will increase over time.

What Is a Cryptocurrency Exchange?

A cryptocurrency exchange is a platform on which you can buy and sell cryptocurrency. To use the exchange, you need to create an account with a digital wallet on the platform. You can use the exchange to convert U.S. dollars into crypto assets or convert one cryptocurrency to another. If you sell your crypto, you can transfer your dollars from your digital wallet into your bank account.

As of December 2023, there are 527 different cryptocurrency exchanges, but the largest cryptocurrency exchange is Coinbase. Coinbase started in 2012, holds nearly $250 billion in assets, and has about 100 million users. Its seven-member executive team includes Coinbase Chief Executive Officer Brian Armstrong and Chief Legal Officer Paul Grewal. Coinbase is available as an app on mobile devices. Its shares are publicly traded on the NASDAQ.

Cryptocurrency isn't backed by any central institution, and your money isn't protected as it would be in a bank or traditional investments. Although some exchanges, including Coinbase, hold your U.S. dollars in FDIC-insured institutions, your crypto assets themselves are not insured. This makes them volatile and risky investments.

Legal Action Against a Cryptocurrency Exchange

Suppose you invest your life savings in Bitcoin. Then, as it happens, the market tanks. You submit a sale transaction in an attempt to mitigate your losses, hoping and praying that it's processed before the market bottoms out, but for whatever reason, the transaction doesn't post. You keep checking your app, frantic, but your sale doesn't go through until the end of the day.

Meanwhile, the market value of Bitcoin has dropped 80%. Your crypto assets are not insured, so you end up losing almost everything. You may want to sue the cryptocurrency exchange for failing to process your transaction when you first tried, but your legal options are limited.

When you created your account on the exchange, you were required to agree to its user agreement. That formed a binding contract. Using Coinbase's terms as an example, you agreed to limit both where you might go for relief as well as how much you can recover.

Arbitration

If you want to sue Coinbase, you are limited to two choices. The first is to pursue arbitration. Arbitration is an out-of-court process in which an independent decisionmaker, often an attorney or retired judge, is hired by the parties to solve their dispute. Each party is given the opportunity to present evidence and arguments, after which the arbitrator issues a decision. That decision is generally final, private, and cannot be appealed.

Arbitration comes with both advantages and disadvantages. The advantages include:

• Arbitration is generally confidential

• The parties are often represented by lawyers

• There are generally few limits on the amount of money an arbitrator may award, although sometimes a contract between the parties limits that money, as is the case with Coinbase

• Many arbitrations are cheaper than filing a lawsuit in court

• You have more say in who decides your case than you do in court

The disadvantages of arbitration, however, can be daunting:

• Your case is not decided by a judge

• You have no right to appeal, in general

• You have no right to have a jury decide your case in an arbitration

• The arbitration may be held in an inconvenient location

• Some arbitrations are just as expensive as filing a lawsuit

Small Claims Court

Your second option is to file a legal action in small claims court. The process is pretty straightforward. You fill out the paperwork, pay the filing fee, serve the paperwork including notice of your lawsuit on the party you have the dispute with, and get a hearing date. You show up at your hearing, present your case, and the judge rules, often then and there. Small claims court can be a great option in a simple case when a small amount of money is in dispute.

Like arbitration, small claims court comes with both advantages and disadvantages. The benefits include:

• Your case is decided by a judge

• Your proceedings are governed by established rules of court

• You don't always need to pay for a lawyer to advise you

• You often get a quick result

• You have the right to appeal your judgment if you are unhappy with the judge's decision.

There are also significant downsides:

• In many states, you cannot have a lawyer in small claims court

• You may not get a jury to decide your case

• The court is limited in the amount of money it can award under state law, an amount between $2,500 and $25,000, depending on where you live

If your dispute with a cryptocurrency exchange involves the fees charged for a particular transaction and the amount of money at issue is small, small claims court may be your best bet. If you're fighting over a lot of money, arbitration may be your best option.

Contractual Limits on Recovery

You may win your case but if you do, you probably won't get much. The cryptocurrency exchange's user agreement comes chock full of disclaimers, restricts your rights, and places strict limits on both the exchange's liability and how much you can recover. Take a look at Coinbase's user agreement for an example.

Disclaimers and Liability Limitations

The user agreement was drafted by the lawyers for Coinbase and it reads like it. It's about as one-sided as it gets. According to the agreement, the services the exchange provides are “as is," which means they don't guarantee their quality. For example, they might process a transaction in a prompt manner, but they might not, and you're stuck with whatever the consequences may be. A delayed sale, for example, could result in a huge loss for you.

You're also stuck with how they manage your money. The fees they charge can change at their whim. And if the market goes south, they can essentially freeze your digital assets, making your funds impossible to withdraw. Your money becomes little more than an unsecured loan to the exchange. This is one of the reasons why many experts are skeptical about investing in cryptocurrency.

Waiver of Rights

You also give up some important rights, two of which are rather significant. You first give up your right to a trial by jury. Juries are used to find out what the facts are in a lawsuit. They are comprised of between six to twelve adults, each of whom hears the evidence. They then deliberate to reach a decision. A right to a jury trial is considered so important that it is enshrined in the Constitution. Giving it up is a big deal.

Second, you give up your right to bring a class action. A class action is a legal mechanism in which a group of people, which can be a huge number, with similar claims bring their dispute in a single legal action. Class actions are a powerful tool for people to pool their resources and assert claims that might not be worth bringing on an individual basis. Although a significant portion of the recovery often goes to the lawyers, the amount that can be recovered is also much larger than you'd get in an individual lawsuit.

Damage Limitations

Bringing legal action against a cryptocurrency exchange may not be worth the cost. Cryptocurrency exchanges limit the amount you can recover in their user agreements. Coinbase takes it to the extreme. If Coinbase fails to process your sell transaction and you lose a lot of money, you are limited to the value of the digital money at issue in the transaction or the total value of digital money in your wallet, whichever is the lesser amount. That may not be much, depending on how big an investor you are.

The agreements also bar recovery of other categories of damages that you might get otherwise. In most states, you cannot get consequential damages, which are damages that flow from what the exchange does wrong. You also cannot get punitive damages, which are damages intended to punish a wrongdoer for particularly outrageous conduct. With all the disclaimers and liability limitations in their user agreements, you would be hard-pressed to recover much even if you end up making a successful legal action.

Cryptocurrency Litigation

That isn't to say that there haven't been efforts to use actual or the threat of lawsuits against cryptocurrency exchanges. States and the federal government are taking increased interest in their behavior and we are beginning to see steps toward regulating the cryptocurrency market. We highlight three situations below.

Coinbase Lend

In 2021, Coinbase announced its intent to launch a program called Coinbase Lend, which would have allowed holders of certain digital currencies to receive interest on their assets. Coinbase promised that the Lend program would give users 4% annual interest on their money if they let Coinbase loan it to certain verified borrowers. The company planned to power its lending program through a stablecoin USD Coin, which is tied to the value of the U.S. dollar.

The U.S. Securities and Exchange Commission (SEC), through SEC Chair Gary Gensler, sent Coinbase a Wells Notice, which is more or less a formal notice of its intent to sue, claiming that offering interest on an asset made the asset a security, and that Coinbase was therefore selling unregistered securities in violation of federal securities laws. While Coinbase denies this, it discontinued the program nonetheless.

Coinbase Class Action

In March 2022, three Coinbase users filed a class action against Coinbase and its CEO in New York federal court. They claim that Coinbase was selling unregistered securities in violation of state and federal securities laws. The list of alleged securities is notable in that it includes the popular Dogecoin. The case was dismissed by the court in February 2023.

GYEN Controversy

In May 2022, Coinbase was sued again by hundreds of users over its role in the promotion of a stablecoin that was anything but. A stablecoin is a cryptocurrency designed to have a relatively stable price, typically by being pegged to a commodity or a currency. GYEN is a cryptocurrency that has its value tied to the Japanese yen.

When Coinbase began trading it in November 2021, it became untethered from the yen. After the market plunged in the spring of 2022, Wall Street reacted and GYEN's value dropped nearly 80% in a single day. Coinbase users are seeking millions in damages. In January 2023, the courts sided with Coinbase, compelling arbitration as dictated by the user agreement the plaintiffs had signed.

FTX Cryptocurrency Exchange

FTX Trading, Ltd., founded in 2019 by Sam Bankman-Fried and Gary Wang, is a now-bankrupt company that operated a cryptocurrency exchange and crypto hedge fund. In July 2021, when at its peak, FTX had more than 1 million user accounts and was the third-largest crypto exchange by volume.

To make a long story short, Bankman-Fried stole assets from the company to fund his lavish lifestyle to the tune of billions of dollars. The company filed for bankruptcy on November 16, 2022. Bankman-Fried was convicted of, among other crimes, fraud in November 2023.

Binance

Binance is a cryptocurrency exchange owned and operated by Changpen Zhao that ran afoul of the Commodities Futures Trading Commission. On March 27, 2023, the CFTC filed a complaint against Binance, Zhao, and its former Chief Compliance Officer, Samuel Lim, alleging numerous violations of the Commodity Exchange Act and CFTC regulations.

On November 21, 2023, the CFTC announced that the parties agreed to a proposed consent order that would require Binance to disgorge more than $1 billion and pay a fine of more than $1 billion, as well as place severe restrictions on Zhao's business practices. The proposed settlement is subject to district court approval. This settlement stands as a warning to other crypto companies.

A Securities Attorney Can Help You

As you can see, investing in cryptocurrency is risky. Although some have made a lot of money, you stand to lose your investment if your crypto does poorly. When investors lose money, lawsuits frequently follow. Unfortunately, suing a cryptocurrency exchange is an expensive proposition, and such cases are hard to win.

You may be upset with the way a cryptocurrency exchange handled your account. Filing a lawsuit, however, may not be your best option. A securities attorney could provide you with legal advice about your alternatives and help you decide whether legal action makes sense in your situation. If pursuing arbitration or filing a lawsuit is right for you, your lawyer can help.