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Enforceable Terms and Arbitration Provisions Important for Providers in Current Crypto Cyberthreat Environment

 |  March 29, 2024

By: Jonathan Mollod (Proskauer – Blockchain & The Law)

A recent Bloomberg Law article highlights a notable decrease in active civil suits against entities like cryptocurrency exchanges, digital wallet providers, and mobile phone companies regarding claims related to crypto hacking incidents or cybertheft. This decline can be attributed partially to heightened security measures and concerted legal strategies that update terms of service provisions and shift such cases to arbitration. The report also indicates that these providers have revisited user agreements to enhance limitations of liability provisions and include class action waivers. These legal tactics remain crucial given the persistent threats of crypto theft, protocol exploitation, and wallet hacks. According to a recent crypto crime report from Chainalysis, while the total funds stolen have decreased by half from the previous year, the number of individual hacking incidents has risen.

A recent appeals court decision by the Ninth Circuit underscores the importance of enforceable terms, particularly in the realm of cryptocurrencies. The Ninth Circuit overturned a district court’s ruling that denied cryptocurrency exchange Coinbase, Inc.’s motion to compel arbitration in a case brought by Plaintiff Abraham Bielski. Bielski alleged an unauthorized and fraudulent transfer of funds from his Coinbase account by cyberthieves. The appeals court found Coinbase’s arbitration agreement, which included a delegation provision, to be enforceable, rejecting arguments of unconscionability.

Coinbase’s user agreement contained a delegation provision, delegating disputes arising from the agreement to an arbitrator, including questions about the agreement’s enforceability, revocability, scope, or validity. Despite Plaintiff’s challenges to the provision, arguing it was procedurally and substantively unconscionable and lacked mutuality, the appeals court ruled in favor of Coinbase. The court recognized some level of procedural unconscionability but deemed the agreement’s dispute resolution procedures reasonable. Ultimately, the court concluded that the delegation provision’s limited levels of procedural and substantive unconscionability did not render it unenforceable…