Ether is a virtual currency that may be traded for normal currencies via online exchanges such as Kraken, the defendant in this case. This class action alleges that a systems problem occurred at Kraken, leading to it locking customers out of their accounts and liquidating their Ether holdings in margin accounts.
The class for this action includes all Kraken account owners who (1) had deposited Ether at Kraken, (2) had it on margin in their Kraken account, and (3) on May 7, 2017, had their margin accounts frozen and liquidated.
According to the complaint, Kraken claims it’s “consistently rated the best and most secure Bitcoin exchange by independent news media” and touts its software as being the best, most reliable, and most secure in the world. But, the complaint says, an incident one afternoon exposed serious flaws in its systems.
On the afternoon of May 7, 2017, the complaint says, for approximately one hour, Kraken experienced a Distributed Denial of Service (DDoS) and a “flash crash,” during which Kraken’s valuation of Ether currency fell by 70%, only to be almost fully restored at the end. During this time, however, Kraken locked users out of their accounts and liquidated the Ether holdings in margin accounts at very low prices.
Kraken claims that it has found no evidence of an attack on its systems or an attempt to manipulate Ether prices, and that the simultaneous occurrence of the DDoS and flash crash was simply coincidence. However, regardless of the cause, the complaint charges that locking out users prevented them from managing their accounts, such as by injecting new capital to prevent the forced liquidation of margin accounts. The complaint claims that Kraken had the ability to suspend trading during the incident but did not do so.
The complaint also contends that when the system was restored, Kraken restored the proper value to all Ether holdings, except for those who had held Ether on margin, and whose holdings remained liquidated.
The complaint claims that the selling of Ether assets at low prices caused these account holders considerable losses. For example, it claims that account holder Maayan Keshet had 970 Ether forcibly liquidated on May 7 while the price was at $96.32, yet the price on June 30, 2017 was $295.06, for estimated damages of $286,208.20.
The complaint claims that if Kraken’s system had been working properly, the incident would not have affected the price of Ether so drastically, and Kraken would not have set off the automatic liquidation of the Ether held on margin. It also claims that if the exchange had been working properly, arbitragers would have leaped in with large buy orders and the price gap would have closed quickly, thus making it unnecessary for Kraken to liquidate the Ether held on margin.