Funny money

Is it legal to shut down a Bitcoin exchange while the price is falling?

One of the biggest Bitcoin exchanges could get hit with lawsuits after halting trading for two hours.

Funny money

Can they do that?

On December 22, the price of Bitcoin began to fall rapidly.
Coinbase, one of the largest cryptocurrency exchanges, halted trading.
Users could not buy or sell Bitcoin for about two hours. Some wondered: Is this legal? The answer is complicated.
Funny money

Is it legal to shut down a Bitcoin exchange while the price is falling?

One of the biggest Bitcoin exchanges could get hit with lawsuits after halting trading for two hours.

Bitcoin’s price has been in a tumble from a high of nearly $20,000 last week to as low as $11,000 today. But for at least two hours, trading on the prominent cryptocurrency exchange Coinbase was stopped.

Coinbase said the outage was because of technical difficulties and not an intent to rescue the currency from freefalling.

“Due to today's high traffic, buys and sells may be temporarily offline,” read an announcement on the exchange’s status page. “We're working on restoring full availability as soon as possible.”

It would be illegal for the New York Stock Exchange to halt trading without following the Securities and Exchange Commission's guidelines, which allow for temporary halts if a company is about to announce important news or if there's an order imbalance between buy and sell orders. Foreign currency exchanges are less regulated, and the SEC has warned speculators that the sector harbors increased risks for loss, malfunctioning trading systems, and fraud.

But it’s difficult to find authorities who will weigh in on the legal protections, if any, that exist for users of cryptocurrency exchanges like Coinbase. A spokesperson for the SEC pointed to an investor alert by the agency which warned that Bitcoin exchanges “may stop operating or permanently shut down due to fraud, technical glitches, hackers or malware.”

Ross Kamhi, an attorney who practices investor and consumer protection in New York and who blogs about legal issues in the cryptocurrency space, said there is little precedent for consumer protections in the world of digital currency. Civil litigation in the cryptocurrency realm, however, has certainly started, and it’s conceivable that Coinbase users who feel that the stoppage cost them money could certainly file a lawsuit claiming damages.

“Courts have not yet ruled on whether federal securities laws or consumer protection laws apply in the cryptocurrency context,” he said. “We’re starting to finally see a lot more lawsuits filed against companies that are issuing tokens in the ICO context. We’re also seeing lawsuits filed against exchanges. We don’t yet know how things will pan out with Coinbase, but if investors lose money from a hack or shutting down trading, there is sure to be litigation.”

It’s not necessarily illegal for a crypto- or foreign currency exchange to halt transactions, Kamhi said, though investors may be able to make legal claims if it does so. “Presumably an exchange's terms of service allows it to halt transactions under certain circumstances, and as far as I understand it there is nothing inherently illegal about this,” he said. “That doesn't mean an investor has no legal claim, but, again, it depends on the specific circumstances.”

Cryptocurrency exchanges operate under the dark cloud of Mt. Gox, which started as a trading site for Magic: The Gathering cards before pivoting to become the world’s largest Bitcoin exchange. Mt. Gox collapsed after it halted withdrawals and eventually conceded that its holdings, worth approximately $65 million at the time, had been stolen by hackers.

“We don’t yet know how things will pan out with Coinbase, but if investors lose money from a hack or shutting down trading, there is sure to be litigation.”
Ross Kamhi, an attorney who practices investor and consumer protection in New York

CEO Mark Karpelès was arrested by Japanese authorities in the wake of the heist, and prosecutors in the country accused him of misappropriating funds. Karpelès was also subpoenaed by the Financial Crimes Enforcement Network, a bureau of the Department of the Treasury, to appear in Washington D.C., but he declined to travel to the U.S. for the appearance. Karpelès said earlier this year that he is facing about a half dozen lawsuits, including one from CoinLab, a tech startup that partnered with Mt. Gox before its collapse.

The nature of a cryptocurrency is that all you need to store Bitcoin is a pair of public and private cryptographic keys. Write those down, stick them in a safe place, and you can access your Bitcoin as long as you don’t lose them. Exchanges like Coinbase make this simpler by providing “wallets” where people can store their Bitcoin using passwords, but there is no reason you should have to use Coinbase in order to move the Bitcoin you own.

“If you have a large amount of money in a crypto wallet, it is not wise to keep it in an exchange,” Kamhi said. “Lots of people had money on Mt. Gox when it dissolved, but what this shows us today is that investors in cryptocurrency today should be careful about where they keep their funds.”

Other major exchanges did not appear to shut down during the same period, which could be fodder for civil litigation. Coinbase rival Kraken did note that it was experiencing high traffic volume. Coinbase did not respond to a request for comment.

The shutdown isn’t the only bad news facing Coinbase. The site also came under fire this week for what critics have called insider trading among its employees before the site started to support Bitcoin Cash, a fork of the Bitcoin project. CEO Brian Armstrong pledged that the company will investigate those allegations internally.

Coinbase is registered as a Money Services Business with the Financial Crimes Enforcement Network, a bureau of the Department of the Treasury. A spokesperson for the Treasury, which supervises banks and provides the government with guidance on fiscal policy, declined to comment. The company also says it's required to comply with the Bank Secrecy Act by verifying customer identities and keeping certain records, the USA Patriot Act and various state laws. Neither the Federal Trade Commission nor the Consumer Financial Protection Bureau, consumer protection agencies that could potentially assert jurisdiction over cryptocurrency exchanges, replied to messages by press time.