A major bitcoin-to-gold trading website is facing a class-action lawsuit after allegedly defrauding thousands of customers.
Coinabul LLC, a service based in Wyoming that exchanges bitcoin, an online currency, for precious metals, continued accepting bitcoin payments despite allegedly stopping shipments for nearly a year, according to a federal complaint filed Friday in Illinois.
FOR THE RECORD
July 29, 6:30 p.m.: An earlier version of this post misspelled the name of the company facing the lawsuit. The post has been corrected to reflect the correct spelling.
The plaintiff, Yazan Hussein, sent 1,644.54 bitcoins -- around $970,000 at current market prices -- to Coinabul in exchange for gold coins and bars, the complaint says. Despite touting a short delivery timeframe, the complaint said, the company never delivered the goods and then refused to give Hussein a refund after he waited several months.
"There was a pretty long time span, close to a year, where these issues were going on," said Benjamin Thomassen, Hussein's attorney.
Calls to Coinabul were not returned Tuesday.
Hussein isn't the only person alleging fraud against Coinabul. The complaint cites multiple posts on bitcoin online forums contending the company defrauded users. In an email sent to customers nearly a year ago, Coinabul founder Jay Shore called the shipping delays "dreary" and said he was developing a workaround.
Because bitcoin is a decentralized currency without any real regulatory structure or way to reverse transactions, the currency is an attractive target for scammers, risk management analyst and former Federal Reserve Bank examiner Mark Williams said.
"Right now in the bitcoin community, there's no consumer protection," he said.
Williams said he wasn't surprised to hear of companies allegedly scamming customers because many bitcoin users aren't aware of the currency's capacity for fraud.
"You build a website, you put a piece of gold on it or a picture of a bitcoin and it gets people excited," he said. "It's like they check their brain at the door."
The answer to that security issue might come in the form of bitcoin escrow services serving as an intermediary, bitcoin start-up founder David Ripley said.
Ripley, who founded bitcoin payment service Glidera, said ideally services would emerge that give consumers and merchants the ability to work with a trusted third party. Though escrow services would cost more, consumer confidence in bitcoin is worth the cost, he said.
"The long-term solution for transactions is the emergence of new services that sit on top of bitcoin," Ripley said.