Coinbase Is Courting Serious Legal Trouble By Not Supporting Bitcoin Cash

The bitcoin blockchain officially forked into two cryptocurrencies Tuesday: bitcoin and Bitcoin Cash.

While there was no civil war among miners and developers this time around, a new fight might soon be found in the courts rather than on message boards.

Coinbase, the largest cryptocurrency exchange, has stated that it will not support Bitcoin Cash, drawing threats of class action lawsuits from users on its message boards.

Related Link: Bitcoin Cash Is Coming: What Investors Need To Know

Why This Is A Big Deal

When the blockchain split, it did not just divide existing bitcoin into two currencies totaling the same value, it essentially created new money. Every holder of bitcoin was, in theory, supposed to automatically receive an equal amount of Bitcoin Cash.

Coinbase, however, holds its users' bitcoins on their servers, as opposed to investors keeping their bitcoin on a private key. Because it — and a handful of other major exchanges — will not distribute Bitcoin Cash to its users, they will not receive money that should be theirs.

As of 9:30 a.m. ET, each unit of Bitcoin Cash was worth about $430. Tim Wu, a professor at Columbia Law School and frequent technology writer, tweeted what the situation means for Coinbase users.

Imagine a stock split where the broker declined to issue the new stock to its owners-- that the @coincase position right now

— Tim Wu (@superwuster) July 30, 2017

Shortly after Bitcoin Cash was announced last week, Coinbase began delaying withdrawals for 72 hours as a “security precaution,” with some commenters going so far as to compare it to the bank runs of the Great Depression and Great Recession.

A Coinbase spokesperson told Benzinga the delay was due to a high backlog of withdrawals at the time. Ironically, the blockchain's too-slow transaction speed was the reason behind the initial fork debate and creation of Bitcoin Cash.

Legal Complications

In its user agreement, Coinbase states: “We do not support metacoins, colored coins, side chains, or other derivative, enhanced, or forked protocols, tokens, or coins which supplement or interact with a Digital Currency supported by Coinbase.”

In other words, it is under no obligation to support Bitcoin Cash. If Bitcoin Cash proves to have staying power though, that may not be enough from “ruinous legal trouble.”

In my opinion, @coinbase is courting serious, maybe ruinous legal trouble if it doesn't give its users the full value of the Bitcoin fork

— Tim Wu (@superwuster) July 30, 2017

Wu told Fortune that the situation is like Coinbase holding a person’s cows: Bitcoin Cash belongs to users like a newborn calf belongs to the cow’s owner.

"My bottom line is that, if you're holding cows for someone else, I'm not sure it's enough to say 'we don't sell veal,'" Wu told Fortune, adding that his assessment was still preliminary.

Coinbase will not support Bitcoin Cash because it "would need to undertake a process of designing and testing significant changes to [its] systems," said the spokesperson.

"If this decision were to change in the future... we would distribute [Bitcoin Cash] to customers associated with bitcoin balances at the time of the fork," said the spokesperson, adding that Coinbase would not keep the Bitcoin Cash associated with said customers' accounts.

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