Hype Watch: A Class-Action Lawsuit Against Kraken for Ethereum Flash Crash Theft?

Journalist:
July 6, 2017

During the Ether flash crash earlier in the year, at least two exchanges reported heavy distributed denial of service attacks wherein users were unable to access, modify, or cancel their positions. As a result, according to a class-action lawsuit soon to be filed in Florida, almost a million bucks was lost at Kraken alone. At the time, Kraken put out a statement indicating that it could not make a habit of reimbursing users who suffered during “the outcome of naturally occurring events in the market, nor losses due to unavoidable DDoS attacks.”

Silver Law Group, a firm which operates in four states and focuses on issues surrounding securities trading, cryptocurrencies – money – says that this is not a good enough excuse for Kraken, and they intend to see Kraken in court over it. Their as-yet-approved and as-yet-officially-filed (yet publicly released) suit alleges:

Plaintiffs and other members of the Class have suffered injury, harm, and damages as a result of Defendant’s unlawful and wrongful conduct. Absent a class action, the members of the Class will not be able to effectively litigate these claims and will suffer further harm and losses, as Defendant will be allowed to continue such conduct with impunity and benefit from its unlawful conduct.

To date, no specific judgement is sought, but it seems obvious the amount will have to be higher than a million dollars plus legal fees.

The Hype

So, why is this apparent news piece appearing in CCN’s Hype Watch series? In case you didn’t notice: this lawsuit was not actually filed yet. While one of our competitors was certainly ordained to get to press with this information first, that is likely because they are a wholly owned subsidiary of a company which also owns Kraken. As such, it is their purview to ensure that they are relaying facts as quickly as possible, so that impropriety on their part is not suspected.

But as to the perspective of Silver Law group, what are the potential motives behind making this document so public, so quickly, before a judge had even decided to let the suit proceed? The class certification process is not even complete. Kraken’s lawyers are likely already looking to get the thing killed in the cradle. And there we have the answer: Silver Law wants to apply public pressure on Kraken before the legalities of their case are even heard; they want Kraken to offer a settlement sooner than later, so they can tally another crypto case on their leaderboard and move on to the next one.

The way this would play out in the non-Bitcoin world would be that Kraken would likely settle if they could not get it thrown out of court, and that would be the end of it, but if it could get it out of court, that would also be the end of it. Virtually every major, non-crypto corporation has several very distasteful class actions against them, yet none of them are large actors in relatively small spaces, like Kraken is, so they are able to recover in terms of public image. Kraken does not have that advantage, so a case could be made that they are truly being victimized, thrice over now:

  1. DDoS attack which tarnished their image and definitely affected their fee earnings.
  2. Lawsuit alleging they owe other victims of the above $1 million in damages or more.
  3. A long, hard fight to regain their reputation in a very unforgiving community.

The timeline that Silver Law has in mind goes like this: if Kraken gets the case out of court, public pressure is still continually applied until it reaches a fever pitch in which the company relents and returns the lost funds. If the case goes to court, Kraken settles. If Kraken does not settle, they ultimately end up paying much more than they would have in settling – or, worse for them, they end up paying and the mounting public discourse regarding them puts them out of business.

So in our reporting, in our social media, in our various aspects of the hype machine, we must be careful not to aide and abet such mob justice tactics. The news here is that Kraken users who were burned in the Ethereum flash crash/DDoS fiasco are being represented by a law firm that knows how the Bitcoin world works: the smallest accusation of impropriety can turn into a witch hunt; people like Gavin Andresen can go from hero to zero simply for holding contrarian opinions; and, most worrisome, businesses can be permanently destroyed.

If the case proceeds, it will be interesting to see if a settlement is reached or whether Kraken decides it has to fight. Indeed, if Kraken is held accountable every time criminals attack their exchange and trades go awry, a very good business model is then minted for cyber criminals and their lawyers. Instead, Kraken and the rest of this industry must hasten the search for technical solutions.

The author hopes this post has the opposite effect to the one Silver Law Group wants it to have. Instead of looking down on Kraken here, we should all consider how thoroughly we actually want laws, regulations, lawyers, and all of their ilk embedded into the various economies we have globally, collectively constructed specifically, in part, to avoid the folly of such.

Disclaimer: The views expressed in the article are solely that of the author and do not represent those of, nor should they be attributed to CCN.

Featured image from Shutterstock.

P. H. Madore @bitillionaire

P. H. Madore has written for CCN since 2014. Please send breaking news tips or requests for investigation to bitillionaire+phm@gmail.com. He lives in Maine, USA. A single father of four young children, he does not discourage financial donations, provided they do not come with strings attached.