Crypto exchanges promise users, whether long term holders or seasoned traders, secure platforms through which to buy, store, and otherwise transact crypto assets. In other words, users are assured full control of their cryptocurrencies. Despite these assurances and in contrast to the testimonials seen online or on television, many users have lost control of their accounts whether assets are frozen, or users are locked out completely of their account permanently or for extended periods of time. As a result, the inability to access leads to either missed opportunities for investment or caused severe financial losses due to extreme market volatility. However, users in this situation are not without legal recourse.
Before taking any action, users must identify the controlling agreement between the parties (i.e., the user and exchange). This usually comes in the form of a “user agreement” or other document agreed to upon account creation containing terms and conditions. In many of these agreements, before a user can take formal legal action, a complaint process must be followed as a prerequisite. For example, Coinbase users agree to the terms of a user agreement upon account creation. It can be found here. Under the Coinbase User Agreement, before a customer can seek relief in arbitration or court system, the user must follow a set of procedural steps in Coinbase’s formal complaint process. This entails submitting a complaint form and giving the exchange a specific amount of time to respond. In the event a user disputes the findings and/or offer to resolve the issue, the user then has the option to escalate the matter.
Depending on the terms of the parties’ agreement, the next step is escalating the matter to a formal legal process such as arbitration or lawsuit in state or federal court. The controlling agreement will typically set forth what options apply to the business relationship, including whether arbitration is mandatory, what state law applies, and where a case must be filed. Again, using Coinbase’s User Agreement as an example, users agree to either seek arbitration or file a complaint in their local small claims court. Users also agree to waive the right to bring a class action or seek a trial by jury. For customers that wish to seek a class action or take their claims before a jury with amounts beyond small claims limits, the enforceability of such a waiver provision will have to be challenged.
Another factor to consider when contemplating litigation is the risk of attorneys’ fees and costs being awarded by an arbitrator or court. Many agreements contain language awarding attorneys’ fees and costs to a prevailing party. In short, if an arbitrator or court finds in an exchange’s favor, the exchange may ask the arbitrator or court to award fees and costs for having to defend the action. Thus, this is a risk that must be considered before moving forward.
Exchange users have a reasonable expectation that they have access to their crypto wallets at any time. Nearly all the exchanges hold themselves out as the easiest places to buy and sell cryptocurrencies. As such, users are not without options when deprived of their investments and can hold exchanges to account.