Coinbase (NASDAQ:COIN) Global Inc. (NASDAQ: COIN) has found itself at the center of major controversy as numerous investors say the company is refusing to return a significant amount of cryptocurrency to users, despite the exchange platform having access to the tokens.
What Happened: Coinbase is holding a significant number of tokens after numerous users deposited Wrapped Ethereum (CRYPTO: WETH) into the company's Ethereum (CRYPTO: ETH) wallets, resulting in it not being accredited to their accounts.
Venture Capitalist Jeff Aronson told Benzinga that he deposited 123.49 WETH to his account, worth nearly $400,000 at the time (but just over $221,000 as of press time), with Coinbase refusing to take any action to recover the funds since the late March deposit.
See Also: How To Earn Free Crypto
Wrapped Ethereum is just Ethereum represented by another token, with the same value but some features that make it a better fit for use in smart contracts such as non-fungible token (NFT) marketplaces or decentralized finance (DeFi) services.
Ethereum can be exchanged one-to-one for Wrapped Ethereum and Wrapped Ethereum can be exchanged one-to-one for Ethereum. But WETH is an ERC-20 standard-compliant token that allows for better management by smart contracts compared to native Ethereum.
This is a difference that is not obvious to new users, and Coinbase's image as a user-friendly exchange caters to those users. This, combined with the influx of new users onto NFT marketplaces that pay out for sales in WETH was a recipe for disaster.
"When sending cryptocurrency to Coinbase, you must send it to the wallet address provided to you by Coinbase. If a user sends unsupported cryptocurrency to Coinbase then that cryptocurrency will be lost and cannot be recovered," a Coinbase spokesperson told Benzinga, declining to delve into details.Twitter Inc . (NYSE: NYSE:TWTR) and other social media platforms provide numerous other examples of users who lost access to their Wrapped Ethereum after transferring it to Coinbase alongside requests to roll out support for WETH to unlock those funds.
Investor Ryan Kindseth wrote in an early May Twitter thread that after selling a VeeFriend series NFT that he had bought for about $3,600 for 9.52 WETH ($36,000 at the time) and sending the funds to Coinbase, he found himself in the same situation as Aronson.
Kindseth said he understood the difference between Wrapped Ethereum and Ethereum, and checked Coinbase for a WETH deposit address only to find "Wrapped Bitcoin, Wrapped Luna, but no Wrapped Ethereum."
At this point, he decided to transfer his assets into his Coinbase account's Ethereum deposit address "since they are the same token" and lost access to it after the transaction was processed in early September 2021.
When he reached out to Coinbase, Kindseth was met with what he describes as an automated "cookie-cutter" response that provided no real help. The response featured a link to the "unsupported crypto recovery" article on Coinbase's website which suggests contacting support so the company can "try to help you recover your previously transferred assets."
Kindseth also reportedly filed a complaint with the Consumer Financial Protection Bureau (CFPB) which forced Coinbase to answer his inquiry. In its response, the cryptocurrency exchange said it "assumes no responsibility in connection with any attempt to use your Digital Currency Wallet with digital currencies that we do not support" in its terms of service.
Coinbase also said its security protocols forbid the disclosure of the private key of any address that it controls and that "no Coinbase.com private key is accessible to any single Coinbase employee" and such a backdoor "would pose a significant risk to the safety of our platform and our customers' funds." The exchange also promised that it was developing a service to help "recover some unsupported assets sent to its addresses that "should roll out later this year." It is unclear whether the message was sent in 2021 or 2022.
Kindseth said that he likens Coinbase to a bank in the Web 3.0 ecosystem "and when you mess up with the bank, you have people there that can help you and support mess-ups like this to build long-term customers."
While we can find numerous examples of Coinbase users not being able to regain access to their WETH in over a year, with support not providing any help to the users, one example stands out.
OhhShiny, an NFT influencer and entrepreneur, with 152,400 Twitter followers wrote in an early April tweet that he has "gotten WETH back from Coinbase, it just might take a few weeks." Still, he told Benzinga that he was wrong in the tweet and got his WETH back from rival exchange, Gemini.
Benzinga's Take: Cybersecurity should be one of the top priorities — if not the top priority — for firms involved in the custody of cryptocurrencies and other digital assets. That means having a single user lose access to funds indefinitely is justified as returning them means potentially exposing the entire platform's wallets.
In the case of Aronson, his address holds WETH worth hundreds of thousands of dollars and some $0.83 worth of Ethereum. Exposing the private key of this particular address to return his WETH would endanger only an additional $0.83 worth of assets. Still, only somebody who has good familiarity with Coinbase's management setup can say whether it is possible to expose a private key while restricting access to others in the system.
Finding a solution is possible, but it may not necessarily be simple. Coinbase has suggested that those problems will be solved. Its support account wrote in a Reddit comment that the firm is "developing a service to help recover some of these cryptocurrencies, which should roll out later this year." However, that message was sent in April 2021 and the recovery service is still nowhere to be seen.
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