U.S. District Judge Vince Chhabria of the Northern District of California. (Photo: Jason Doiy/ALM)

At the beginning of a hearing in a lawsuit claiming Coinbase botched the launch of bitcoin cash trading on its cryptocurrency exchange, U.S. District Judge Vince Chhabria gave the lawyers on both sides something of a disclaimer.

“So this obviously is a kind of brave new world that we're discussing in this lawsuit, and it's not a world that I'm remotely familiar with,” said Chhabria, before running through the allegations in the complaint, as he understood them.

Bitcoin cash was created last year in a so-called “hard fork” of the bitcoin blockchain—the creation of a variant of the original software. According to the complaint, filed in March on behalf of Arizona resident Jeffrey Berk by Robert Green of Green & Noblin and Lynda Grant of The Grant Law Firm, Coinbase initially suggested it would not handle transactions in bitcoin cash, but later said it would begin supporting some transactions in January 2018. Coinbase abruptly changed course, opening trading on Dec. 19.

Berk, the lead plaintiff, claims that the value of bitcoin cash spiked 200 percent upon its listing on Coinbase, and the company suspended trading just minutes later. His buy order was ultimately fulfilled 20 hours later after trading resumed at $4,200.98 per unit—more than $2,000 more than the price he claims to have agreed to.

After laying out the alleged facts, Chhabria asked Green and Grant what the judge said “may be dumb questions” for someone familiar with the cryptocurrency and exchanges like Coinbase.

“How should Coinbase have done this? How should Coinbase have rolled this out? And how should Coinbase have executed this to avoid the problems that occurred?” Chhabria asked.

Grant said that there was evidence that Coinbase insiders had traded in bitcoin cash on other platforms after being informed Coinbase would support trading the cryptocurrency in the months prior to the official announcement—a move that was necessary to make technical preparations.

But Chhabria noted that the insider trading allegations weren't part of the complaint, and that the plaintiff hadn't laid out why Coinbase should have informed its users sooner about the impending bitcoin cash launch.

“Are you saying essentially that the way that Coinbase handled this rollout facilitated a pump-and-dump, that Coinbase should have known what was going to happen or did know what had happened?” Chhabria asked.

Grant said that, indeed, she was claiming that Coinbase itself might have been participating in such a scheme and making trades that profited on the losses of its customers.

“Intuitively, it seems like this is something that was bungled, but I don't know how well the complaint explains again why it was bungled and what the motivations were?” Chhabria said. “It may be because this is a new world, a new area that we judges don't know as much about as we know trading stocks at Charles Schwab.”

In Coinbase's defense, Steven Ragland of Keker, Van Nest & Peters said that the words “pump-and-dump” never appeared in the complaint, and that plaintiff's counsel were leveling all kinds of new claims inappropriately. At one point, after Grant said that she wasn't sure she understood how the implications of a regulator's investigation into the pricing of bitcoin futures might relate to Coinbase's motivations, Ragland took issue.

“If you don't understand it yourself, don't allege it yourself against my client in open court,” Ragland said. “We need to know what we're shooting at because so much has been said that's just false.”

At the conclusion of Thursday's hearing, Chhabria indicated that he's leaning toward granting Coinbase's motion to dismiss but giving the plaintiff leave to amend. He also said that he was inclined to deny Coinbase's motion to compel arbitration, but without prejudice to the company asking again later.

 

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