Coinbase Charge Confusion Highlights Growing Pains of Digital Currency Industry
Certain customers of digital currency exchange Coinbase reported mysterious charges appearing on their credit and debit cards in late January and early February.
Users quickly took to Coinbase’s Reddit page to complain about being double-charged for past transactions. The San Francisco-based Coinbase is the biggest digital currency exchange in the United States, with the ability to buy and sell bitcoin, bitcoin cash, ether, and litecoin.
While Coinbase immediately said it would reimburse all customers affected, it was simply the latest black eye suffered by the nascent digital currency industry and its underdeveloped infrastructure.
There was initial confusion on what exactly happened. Coinbase’s Twitter account pinned the double charges on Visa and the credit cards’ issuers. Visa also denied that it was to blame, telling technology media The Next Web that it “has not made any systems changes that would result in the duplicate transactions cardholders are reporting.
On Feb. 15, Coinbase provided an update on its official blog, stating that the erroneous charges were the result of banks and credit card issuers recently changing the “merchant category code of digital currency purchases to “cash advances” which typically means the bank would charge a higher fee on such purchases going forward.
As a result of this change—which had nothing to do with Coinbase—certain purchases made between Jan. 22 and Feb. 11 were reprocessed and refunded by the card issuers. The erroneous charges were due to “a delay between the issuance of the new charge and the offsetting refund,” Coinbase said.
Visa and card payment processor Worldpay on Feb. 16 issued a joint statement and confirmed the nature of the issue, stating that the “issue was not caused by Coinbase.” Moreover, “All reversal transactions have now been issued, and should appear on customers’ credit card and debit card accounts within the next few days.”
While the problem was ultimately minor and Coinbase was absolved of blame, the credit card problem was simply the latest hiccup for Coinbase, which operates at the intersection of the emerging cryptocurrency industry and traditional banking.
In June 2017, Coinbase had to reimburse some users who suffered losses due to stop-loss or margin call as a result of a flash crash in Ether prices on GDAX, Coinbase’s professional trading platform. In December 2017, the company launched an investigation into whether certain employees improperly profited on insider information prior to the December launch of Bitcoin Cash—an August 2017 hard fork of bitcoin—on Coinbase. The company also suffers frequent outages due to the increased popularity of digital currencies and the resulting high trading volume. In January, Coinbase hired Tina Bhatnagar—a former Twitter executive—to improve customer service at Coinbase as digital currencies are fast becoming a mainstream asset class.
Coinbase received around $108 million in Series D financing last year, at a pre-money valuation of $1.5 billion, according to Crunchbase.
Recent Exchange Hiccups
Cryptocurrency exchanges around the world have experienced significant issues in recent months as regulations, procedures, security, and infrastructure have not kept up with increasing investor demand for digital currencies and heightened price volatility.
Coincheck, one of Japan’s biggest digital currency exchanges, endured a major hack earlier this year resulting in 523 million stolen NEM coins. NEM is a token that runs on its namesake smart asset blockchain. Using NEM pricing at the time of the breach, the Coincheck hack resulted in estimated losses of around $500 million.
The Coincheck security breach of 2018 was the biggest and costliest to date, eclipsing previous notable hacks such as Mt. Gox in 2014, BitStamp in 2015, and Bitfinex in 2016.
Kraken, another popular U.S.-based exchange, suffered a multi-day system outage in January on a system upgrade that was originally planned to cause a two-hour outage.
Binance, a Hong Kong-based exchange and one of the world’s busiest, earlier this month suspended all trading and withdrawals for more than 24 hours as it worked through challenges in connection with a data system upgrade.
Fragmented Regulatory Response
A thoughtful and coordinated regulatory framework could help establish consistent standards around processes and procedures, liquidity, security, and governance for digital currency exchanges and other industry service providers. It could also improve the application of existing laws around money-laundering and securities fraud in the nascent industry.
But so far, regulators in different jurisdictions have been divided in how to approach the sector. Most U.S.-based exchanges are established as payment providers or currency exchange providers, which are governed by state regulators.
The New York State Department of Financial Services has been on the forefront of this, and was one of the earliest to grant a so-called BitLicense to govern companies involved in the buying, selling, and storing of digital currencies in the state or with a state resident. South Korea—one of the world’s biggest digital currency markets—is currently studying the New York model and considering a similar licensing approval system later this year, according to a Business Korea report.
But regulators believe the existing model may need more work.
“Current approach of state-by-state money transmitter licensure … leaves gaps in protection for virtual currency traders and investors,” Christopher Giancarlo, Chairman of the U.S. Commodity Futures Trading Commission (CFTC) told the U.S. Senate Banking Committee on Feb. 6, according to written testimony. This licensing approach means that most digital currency exchanges are not directly regulated by the CFTC or the Securities and Exchange Commission (SEC).
While recognizing the regulators’ mandate to foster and protect innovation, regulators must work to “deter and prosecute fraud and abuse,” wrote Giancarlo and SEC Chairman Jay Clayton in a joint op-ed in The Wall Street Journal earlier this month.
Some European officials have been more draconian in their view of the emerging economy. Agustin Carstens, general manager of the Basel, Switzerland-based Bank for International Settlements, opined that “novel technology is not the same as better technology or better economics,” and characterized bitcoin as “a combination of a bubble, a Ponzi scheme, and an environmental disaster,” in a speech at Goethe University in Frankfurt on Feb. 6.
Yves Mersch, an executive board member at the European Central Bank (ECB), told Bloomberg in a Feb. 6 interview that the ECB has “similar worries” regarding digital currencies. “There is so much money flowing in that it’s like a gold rush—but there is no gold.”
In a regulatory vacuum, the digital currency sector has taken upon itself to foster regulation in a bid to increase dialogue with government agencies and securities regulators.
Japan’s two main digital currency industry groups plan to merge and form a new self-regulatory body to govern the country’s cryptocurrency trading operations, according to Japanese media Nikkei.
The new entity, which as of Feb. 18 was unnamed, will unite the Japan Blockchain Association and the Japan Cryptocurrency Business Association. The regulatory body will develop rules around the protection of assets, system security mandates, and advertising procedures. Self-regulation plans were in development for months but were fast-tracked recently following the Coincheck hack.
Seven digital currency companies in the UK formed a cryptocurrency trade group called CryptoUK in early February. The organization will produce a code of conduct for the industry and “promote best practice and to work with government and regulators,” CryptoUK Chairman Iqbal Gandham told Newsbtc.com, a website dedicated to cryptocurrency news.
CryptoUK members include some of UK’s biggest industry players such as Coinbase, Cex.io, and eToro.