Cryptsy was once one of the highest volume exchanges in the virtual currency world. Now, it's completely defunct.

Back in late 2015, after a couple years of being one of the higher volume virtual currency exchanges, it was announced that Cryptsy was insolvent and would have to suspend it's business until it's clients could be repaid. 

At the time it was shocking, but it didn't really come as that much of as surprise to savvy Cryptsy customers because they could see the writing on the wall for months. The company had been having increasingly escalating service issues before the final announcement came months later. 

Following a similar path of decline to that of Mt. Gox, which was one of the premier bitcoin trading exchanges before it also rapidly went under. 

What Happened?

This is where things get a little murky. At the time when Cryptsy announced they would be suspending operations, the CEO Paul Vernon claimed that the company had been hacked to the tune of 13,000 Bitcoins and 300,00 Litecoins. 

The company had found out about this months prior and had been operating on fractional reserves ever since. Which is why it had been having so many service issues. Needless to say when that kind of inventory was removed it was only a matter of time before the exchange collapsed. 

At the time, the report was that one of the altcoins that Cryptsy had been supporting had malicious code in it's source which backdoored the exchange. It was able to run the code on the exchange platform and steal large amounts of virtual currency. 

Who did the hacking?

At the time it was alleged it was an anonymous individual or individuals and the company was going to work at restoring customer funds. 

However, shortly into an investigation it was revealed that the CEO of Cryptsy was likely the one doing the "hacking". Stealing customer funds and depositing them into his own personal accounts. 

CEO Paul Vernon denies these allegations, but the proof according to Crypto's clients is pretty damming. 

Vernon destroyed critical pieces of data just before the investigation began which would have helped locate some of the missing funds. The clients allege this was done in attempt to cover his own tracks. Vernon hasn't responded to those criticisms. 

What's the latest twist?

In a complaint filed several months back Cryptsy's former customers alleged that the source of the money laundering should also be held accountable as well for the wrong doing's of Cryptsy's former CEO. That source is none other than Coinbase.

Coinbase is a regulated money services business in more than 30 US states and according to the complaint, they should have known that the approximately $8.3 million dollars in funds that Vernon was funneling through Coinbase was coming from questionable sources.

Vernon was claiming that it was coming from profits from the business, even though it was revealed quite easily that the business had no profits for months as they were barely able to stay afloat once the inventory was crippled by the "hack".

Now Coinbase finds itself in the middle of the controversy. 

Coinbase originally sought to negotiate the dispute through arbitration, citing the agreements Vernon signed when Cryptsy began exchanging funds through Coinbase. 

However, on June 1st, Judge Kenneth A Marra shot down the motions to compel arbitration and to stay discovery, arguing that Cryptsy customers weren't bound by the agreements that were signed by Vernon. 

This means that there is likely no chance of the issue being resolved outside of court. This decision sets the stage for the suit against Coinbase to advance. 

David Silver, one of the lawyers representing the former customers, had this to say following the judges decision:

"We believe that Cryptsy users that did not sign the contract with Coinbase are entitled to their day in court and to be judged by a jury of their peers. We are quite happy the court agreed with our thoughts, and the case is going to move forward in the public light."

What do you guys think, should Coinbase have known or done some kind of due diligence to find where those funds were coming from? Furthermore, in your opinion, does the agreement that Vernon signed cover Coinbase from any of the wrong doings the former customers are alleging?

Things could get very interesting here over the next several months. 

The biggest take away from all of this?

I think the biggest take away from all of this and from this case in general are the signs to look out for when deciding if there is a possibility of a currency exchange collapsing. 

There have been some tell tale signs letting us know that exchanges are not well. Increasing or escalating service issues seem to be one of the main signs that several of these now defunct exchanges had in common.

Without naming any names here, there is one very popular exchange that has been having a large number of problems lately. Hopefully it has just been related to the massive influx of new customers but it certainly should be raising a flag in the eyes of it's customers...

Be careful where you store your coins.

Stay informed my friends!

Sources:

https://news.bitcoin.com/cryptsy-bitcoin-exchange-announces-massive-theft-shuts-indefinitely/

http://www.coindesk.com/coinbase-to-face-trial-over-possible-role-in-cryptsy-exchange-collapse/

Image Sources:

https://news.bitcoin.com/cryptsy-bitcoin-exchange-announces-massive-theft-shuts-indefinitely/

https://bitconnect.co/bitcoin-news/331/million-dollar-settlement-approaches-for-victims-of-cryptsy-exchange-scam

https://www.coinbase.com/legal/user_agreement

http://themerkle.com/cryptopolis-altcoin-exchange-cryptsy-clone/

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