Saturday, August 8, 2020

California Court of Appeal, First Appellate District, Archer v. Coinbase, Inc., Docket No. A157690, Certified for Publication

 

Bitcoin

 

Cryptocurrency

 

Online Digital Currency Exchange Platform

 

Blockchain

 

Internet Law

 

User Agreement

 

Breach of Contract Claim

 

Parole Evidence v. Integration Clause

 

California Law

 

Contract Drafting

 

 

(…) As plaintiff correctly notes, this case—concerning the recovery of damages for failure of a cryptocurrency exchange to provide access to a forked digital currency created by a third party—presents an issue of first impression in California.

 

 

Plaintiff Darrell Archer filed suit against Coinbase, Inc. (Coinbase), an online digital currency exchange platform, alleging causes of action for breach of contract, negligence, and conversion stemming from Coinbase’s purported refusal to allow him to access a “forked” cryptocurrency (Bitcoin Gold) stored in his Coinbase account. The trial court granted summary judgment for Coinbase.  Plaintiff filed an appeal from the order granting summary judgment. We affirm.

 

 

A digital currency (also known as “cryptocurrency”) is a type of currency maintained by a decentralized network of participants’ computers, rather than a centralized government or organization.  Anyone can volunteer his or her computer to be part of such a network by running software that allows the computer to interact with the network. Once an individual joins a particular digital currency’s network, he or she can interact with that digital currency.  A holder of a digital currency can send it to another individual on the network, by authorizing that it be sent to the recipient’s “public key,” an alphanumeric string of characters that acts as a public identifier.  Transactions between network participants are recorded on a “blockchain,” which is a public ledger of digital currency transactions.  Bitcoin is among the world’s most well-known digital currencies, but there are thousands of digital currencies in existence.  Each operates on its own unique network and blockchain ledger.  Anyone can create a new digital currency, and new currencies are created almost daily.

 

 

On October 23, 2017, plaintiff had 350 Bitcoin stored in his account with Coinbase.  That day, a third party launched a new cryptocurrency, “Bitcoin Gold,” as a “fork.”  A fork is a way of creating a new digital currency by copying the source code of an existing digital currency’s blockchain and repurposing it into a new digital currency network.  When a developer creates a fork, the existing ledger of transactions from the original currency is used, and holders of the original currency are assigned equivalent units of the new currency on the new network.  The new currency then “forks” into a separate blockchain ledger that records transactions of the new currency between participants in the new network.

 

 

When Bitcoin Gold was created, Coinbase monitored and evaluated Bitcoin Gold’s network and decided it would not support the new currency.  Coinbase informed its customers via its website:  “ ‘At this time, Coinbase cannot support Bitcoin Gold because its developers have not made the code available to the public to review.  This is a major security risk.’ ”  In 2018, the Bitcoin Gold network was attacked by hackers who stole millions of dollars of funds from trading platforms and individuals on its network.

 

 

On March 27, 2018, plaintiff filed suit against Coinbase.  Shortly thereafter, plaintiff filed a first amended complaint, alleging various causes of action based on Coinbase’s failure and refusal to allow him to receive his forked Bitcoin Gold currency and Coinbase’s retention of control over plaintiff’s Bitcoin Gold for its own benefit.

 

 

The trial court subsequently granted summary judgment for Coinbase on all three causes of action.  The court concluded, “The fact that Coinbase’s User Agreement with Plaintiff contains no provision requiring Defendant to provide services related to any particular digital currency created by a third party is dispositive, requiring the Court to grant this motion.”

 

 

Breach of Contract Claim

 

We agree with the trial court that plaintiff’s breach of contract claim fails because plaintiff did not establish the existence of an agreement with Coinbase to provide the Bitcoin Gold to him.  (Sonic Manufacturing Technologies, Inc. v. AAE Systems, Inc. (2011) 196 Cal.App.4th 456, 464 [elements of breach of contract cause of action are existence of a contract, plaintiff’s performance, the other party’s breach, and damages]; Levy v. State Farm Mutual Automobile Ins. Co. (2007) 150 Cal.App.4th 1,   5  (Levy) [claim for breach of contract requires plaintiff specifically plead breach of agreed upon contractual provision].)  It is undisputed that the User Agreement does not contain a provision requiring it to support or provide services for any particular digital currency created by a third party.  Plaintiff also did not dispute he was aware at the time of the fork that Coinbase does not support every digital currency and that Coinbase has no duty or obligation to support every new digital currency that is created.  Coinbase presented evidence it monitored and evaluated Bitcoin Gold’s network when the new currency was created, determined the network was not stable or reliable, and issued a public statement that it would not support the new currency due to security concerns.  Plaintiff did not identify any representations, oral or written, by Coinbase that it would support Bitcoin Gold, or that it would provide usual and customary services.

 

 

On appeal, plaintiff argues the trial court erred in its interpretation of the User Agreement.  First, plaintiff contends his “right and entitlement” to the Bitcoin Gold fork is established by his possession and ownership of Bitcoin on deposit with Coinbase.  But regardless of whether that is true, plaintiff’s alleged ownership of Bitcoin Gold resulting from the cryptocurrency fork says nothing about Coinbase’s contractual obligation to provide Bitcoin Gold to plaintiff.

 

 

(…) Both versions of the User Agreement submitted by Coinbase and electronically signed by plaintiff had integration clauses stating the agreement represented the entire agreement between the parties and superseded “any and all prior discussions, agreements and understandings of any kind . . . .”

 

 

We further reject plaintiff’s attempted reliance on parol evidence because the User Agreement contains an integration clause stating it is the “entire understanding and agreement” of the parties.  “When the parties to a written contract have agreed to it as an ‘integration’—a complete and final embodiment of the terms of an agreement—parol evidence cannot be used to add to or vary its terms.”  (Masterson v. Sine (1968) 68 Cal.2d 222, 225; Brown v. Goldstein, supra, 34 Cal.App.5th at p. 432.)  Plaintiff did not present any extrinsic evidence of a collateral agreement in opposition to the summary judgment motion.

 

 

As plaintiff correctly notes, this case—concerning the recovery of damages for failure of a cryptocurrency exchange to provide access to a forked digital currency created by a third party—presents an issue of first impression in California.

 

 

We decline to impose a major new absolute tort duty on digital currency exchanges to honor forked currencies.

 

 

 

 

 

(California Court of Appeal, First Appellate District, August 8, 2020, Archer v. Coinbase, Inc., Docket No. A157690, Certified for Publication)

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