“Not Your Keys Not Your Coins” Becomes the Law of the Land in California.


A Lawyer’s Explanation of Archer v. Coinbase (2020) 53 Cal. App. 5th 266

We’ve all heard the cautionary phrase spoken on Crypto Twitter telling folks to take their crypto portfolios off of the exchanges and move them to cold storage wallets. The phrase “not your keys not your bitcoin” has become as common as the term hodl itself. Crypto prophets like @bitcoinzay use the catchy “No 🔑 No 🧀” Twitter handle to embed this message into the minds of their users on a daily basis. It’s a good catch phrase, I’ll admit. However, when I first heard the phrase “Not Your Keys not Your Coins,” I immediately assumed this was paranoid ramblings of crypto diehards who wanted to find the newest way of showing off their continued contrarianism to a legacy system that was holding on for dear life. I found myself justifying my own holdings on crypto exchanges as being analogous to holding my emails on a server that I did not own. Not your server, not your emails, right? A retort I heard from Winklevii.

I recently came across some interesting case law coming out of California in August 2020 that has caused me to second guess my entire thought process on this issue. The case is called Darrel Archer v. Coinbase Inc, (2020) 53 Cal. App. 5th 266. Before I get into the legal precedent that this case set and how it affects those holding crypto assets on exchanges, it’s worth noting some interesting concepts and background that gave rise to this case.

If you’re reading this, I’m fairly confident you’ve heard of Coinbase and know what they do. I won’t get into the details of that here. What is important to know from this case is that a man named Darrel Archer held approximately 350 bitcoins with his account on Coinbase on October 23, 2017. On this day, a third party launched a fork called Bitcoin Gold (“BTG”), which would have provided each Bitcoin holder with the equivalent amount of BTG coins at the time this new currency became forked. However, Coinbase reviewed Bitcoin Gold and decided that it would not support the BTG network because the BTG developers refused to make their code available to the public for review. They argued this posed a major security risk to their user base. One year later, the BTG network gets hacked and millions dollars worth of BTG funds gets stolen by hackers. If Coinbase was indeed holding its user’s BTG funds, it was likely gone at this point. Because Mr. Archer held 350 bitcoins on Coinbase at the time of the fork, he would have received 350 BTG coins but-for Coinbase refusing to support the network and airdropping him his BTG coins. His 350 BTG coins would have been worth approximately $160,000 at its peak. (I may be off on this, but it’s close). This likely is what led to a very pissed off Darrel Archer and/or a very thirsty Plaintiff attorney.

Mr. Archer filed a lawsuit against Coinbase in the San Francisco Superior Court, Case No. CGC-18–565281, alleging (1) negligence, (2) conversion, and (3) breach of contract. Mr. Archer based these claims on Coinbase’s failure to allow him to receive his BTG coins and Coinbase’s retention of control over his BTG coins for its own benefit.

After some procedural posturing, the Court addressed each of Mr. Archer’s claims one by one, beginning with his claim for breach of contract. First, attorneys for Mr. Archer argued that a contract was created when he opened his account and paid Coinbase for its services. The contract was based on Coinbase “holding itself out as a cryptocurrency trading and storage exchange and platform” and its representations to new users “to provide the usual and customary services of a cryptocurrency exchange as is usual and customary in such industry.” He argued Coinbase breached this contract by failing to give him his BTG coins despite his possession and ownership of Bitcoin on deposit with its exchange. He argued that Coinbase had the code capable of easily providing him his BTG coins since they were in possession of the private keys and they failed to do so. He argued that the language in the User Agreement itself, which contained the word “support,” was vague and ambiguous such that that if interpreted using the customary industry standard, would lead him to believe Coinbase would have supported BTG since it supported other forked coins.

The Court rejected these arguments stating “…the pertinent question is whether Coinbase had a contractual obligation…, and the undisputed evidence submitted by Coinbase shows it did not.” The Court determined that the language of the User Agreement contained the entire agreement between the parties. Thus, outside evidence could not be brought in to determine the meaning of the agreement. Furthermore, they found that Mr. Archer’s own expert witness, Dr. Charles Evans, stated in a sworn declaration that, “when determining whether to support a new fork, Coinbase relies on subjective and self-serving criteria, such as demand and value of the new currency and the effort required to support it. Evans asserts these criteria are arbitrary and capricious and without any indication or published industry standard as to what are acceptable standards for refusing to support a fork.” The Court found that Dr. Evans did not provide an adequate explanation of what the customary use of the term in the industry would be. The Court found that the agreement itself was dispositive and determined that no side contract had been made as Coinbase users “cannot impose additional obligations on Coinbase, such as an obligation to support Bitcoin Gold or to provide usual and customary services of a cryptocurrency exchange, that did not exist when he accepted the User Agreement.”

To prove a claim for conversation, a tort claim (think injury lawsuits), Mr. Archer had to show that (1) he had a right to possession of the property, (2) Coinbase’s wrongful act or disposition of the property interfered with his possession, and (3) as a result he sustained damages. Coinbase’s lawyers argued that the exchange actually did no such wrongful act because they failed to do anything with the BTG coins at all. In other words, there couldn’t be a wrongful act to deprive Mr. Archer of his property because there was no act by them at all. Mr. Archer made a fairly creative legal response whereby he argued that Coinbase’s inaction, knowing he had no ability to access his BTG on his own, was tantamount to direct conduct depriving him of his property and was Coinbase’s way of exercising complete dominion and control over his property, thus depriving him of it. Clever!

This was the first time a California Court had encountered this issue in relation to cryptocurrencies so they looked to guidance from a Georgia appellate case, BDI Capital, LLC v. Bulbul Invs. LLC, (2020) 446 F. Supp. 3d 1127, which was decided five months prior. In BDI Capital, the GA court issued a ruling that is quickly becoming a landmark decision given the recent citation here in the Archer case:

“[I]n order for a bitcoin owner who holds [his or] her virtual currency in an exchange (or other type of shared wallet) to access the forked currency, the exchange must take some affirmative action. The Court would be imposing a major new duty on all cryptocurrency exchanges . . . to affirmatively honor every single bitcoin fork. Bitcoin investors are aware they are operating in an unregulated market, and therefore it seems more reasonable to place the burden to ensure access to forked currency on the investors themselves. There is no requirement that investors keep their coins in exchanges; they can always withdraw the coins to their own private wallets. In the unregulated cryptocurrency market, potential investors are well advised to ensure that the terms of service of the exchange they are using clearly spell out what the exchange’s obligations are with respect to forked currency, if any.”

If you’re seeing what I am seeing then I think it’s safe to call this decision the “Not Your Keys Not Your Coins” ruling. The Court in Archer adopted this ruling and held that because Mr. Archer provided no evidence that Coinbase had a duty to give Mr. Archer access to the BTG it was not going to impose a new legal duty on exchanges to honor forked currencies.

Finally, the Court addressed whether Mr. Archer had the right to recover damages from Coinbase given their failure to provide him with the ‘forked’ BTG coins. When proving a claim for negligence, a claimant must show that the defendant owed a legal duty, the defendant breached that duty, and the breach caused the plaintiff’s damages.

Mr. Archer argued that Coinbase owed him a legal duty to allow him to “acquire” all cryptocurrency to which he was entitled, based on his opening an account with Coinbase and complying with their terms and conditions of the User Agreement. However, the law in California has long been stated that recovering damages in a tort claim merely based on allegations of contractual breach is prohibited. In other words, Mr. Archer could not simply argue that Coinbase negligently performed its contractual duties to recover tort damages. He must have shown that Coinbase had some independent duty to provide him for services that involved ‘forked’ occurrences. The Court refused to find that duty in this case.

While this case seemingly only binds those investors and businesses operating and doing business within the confines of California, the true impact of this case will no doubt be the impact it has on other jurisdictions within the United States. Justin Wales, Co-chair of Carlton-Fields, posted on his twitter account that as new jurisdictions hear similar claims they will likely look to California’s lead on cryptocurrency custody claims. I have to agree with my fellow attorney on this one. This case has big precedent and that precedent is likely hear to stay for quite some time. What I’ve learned from this case is that the Courts are beginning to look at who is in custody of the keys as the deciding factor of who is afforded protection under the law. Those who hold the keys, are protected by the Courts. Those who don’t, are not. In other words, Not.Your.Keys.Not.Your.Coins.

“Not Your Keys Not Your Coins” Becomes the Law of the Land in California. was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.