Coinbase to Face Trial over Possible Role in Cryptsy Exchange Collapse

A growing legal dispute between the customers of a now-defunct cryptocurrency exchange and the business itself has ensnared one of the industry's largest and best-funded startups.

Former customers of the exchange alleged in a complaint filed in December that Cryptsy and its CEO, Paul Vernon, laundered millions of dollars-worth of their funds through Coinbase over a several-year period as part of a bid to abscond with their money.

At the heart of the argument is that Coinbase, as a regulated money services business in more than 30 states, should have known that the approximately $8.3m in funds – which Vernon allegedly claimed were derived from Cryptsy’s profits, as well as his own activities – came from a questionable source.

The backstory: The case represents the last twist in the long-running Cryptsy saga.

Once one of the most voluminous exchanges for alternative digital currencies, Cryptsy collapsed in late 2015 after months of escalating service issues. Trading was ultimately suspended in early January of 2016, and just days later, the exchange went offline amid claims of insolvency and concealed theft.

A class action lawsuit, filed in Florida, soon followed, with a court-appointed receiver taking control of Cryptsy's assets in the spring of 2016, setting the stage of a settlement agreement between users and Vernon's ex-spouse, who was also named in the original suit.

Vernon, who has not responded in court to the suit, has denied allegations that he stole millions of dollars worth of funds from users.

The current saga: It's those funds that are at the center of the case between the class-action users and Coinbase.

Coinbase, which declined to comment on the lawsuit when reached for comment, sought to negotiate the dispute through arbitration, citing user agreements Vernon signed when he and Cryptsy first began exchanging funds through Coinbase. Further, the startup asked the court to stay the case pending that arbitration, as well as prevent discovery from taking place.

Yet, in a court order from 1st June, Judge Kenneth A Marra shot down Coinbase’s motions to compel arbitration and to stay discovery, arguing that Cryptsy users weren't bound by the agreements signed by Vernon.

Attorney David Silver, one of the lawyers representing the users, reiterated those arguments in an interview with CoinDesk.

"We believe that Cryptsy users that did not sign the contract with Coinbase were entitled to their day in court and be judged by a jury of their peers," he said."[W]e're quite happy the court agreed with us, and this case is going to move forward in the public light."

He said that Cryptsy's body of users have been waiting years for some kind of resolution, highlighting how the value of bitcoin has risen sharply in that time.

"The users we represent from Cryptsy, they’ve been killed," said Silver.

What comes next: Judge Marra's decision effectively blocks any effort to resolve the case out of court, setting the stage for discovery and for the suit to advance.

A broader class-action suit – in which Crypsty users have sought to reacquire funds lost during the exchange's collapse – is also moving ahead.

According to Silver, the legal team behind the class-action suit is gearing up for its first distribution of funds, gleaned from the settlement with Vernon's ex-spouse – a process he said should take place over the next several months. In the meantime, he said, the case filed against Cryptsy will continue following Marra's ruling.

"We're gonna hit the ground running," said Silver.

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Coinbase.

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