Coinbase customers say it's vulnerable to hacks

Yahoo Finance’s Alexis Keenan joins the Yahoo Finance Live panel to discuss Coinbase customers saying that the platform is vulnerable to hacks.

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ZACK GUZMAN: I want to shift over to another stock we've been watching here since it set a record yesterday with the largest direct listing. That would be Coinbase. But security concerns-- interestingly, one of those things that some bulls would point to is saying this is a company that's leading the security space.

But interestingly, some customers out there have a very different take, saying that the company is vulnerable to hacks. And for more on that, I want to bring on Yahoo Finance's Alexis Keenan, who's been digging deeper into that issue for us. Alexis?

ALEXIS KEENAN: Hi, Zack. Yes, so I've been talking to those unfortunate users of Coinbase and of other digital currency platforms who say they were wiped out. They lost all of their assets to hackers on these platforms. And the victims say that there's largely no recourse for them to recover their funds from Coinbase. They say that they experienced substantial delays in talking with the company.

And also, they feel like they're interfacing when they email the company and they express their concerns, they feel like they're interfacing with bots oftentimes. They say there's also no help from regulators, like the SEC, like FinCEN, like the FTC. Also, no help from law enforcement, unfortunately, whether they're talking to the FBI or local agencies.

Now, legal experts say that's what's driving these lax security measures, according to them. Coinbase certainly doesn't agree with that statement. But they say that there's this combination of ineffective laws, on one hand, and also little to no law enforcement. And this is all, they say, as a result of a legal framework that really wasn't built for the decentralized nature of these crypto assets.

So I want to show you on the screen the laws that do apply to these companies like Coinbase right now. Now, they're called money services businesses. Those are the companies that are engaged in the very business of handling and transmitting money.

Now, at the federal level they're required to get a license from the Financial Crimes Enforcement Network. That's FinCEN. And under FinCEN, FinCEN has said, well, you've got to adhere to the Bank Security Act's anti-money laundering regulations, as well as those regulations known as your client rules. Now, both of those a bit undermined, of course, because of the anonymous nature of crypto transactions.

At the state level, on the other hand, these companies have to get a license state by state by state. Each state has its own licensing body that is unique to it and it does take a lot of time and money for these companies to obtain these licenses. In New York in particular, there's an additional requirement that these companies get what's called a BitLicense.

Now, Coinbase says that these account breaches are very rare. And they particularly want to note that Coinbase itself, they say, has never been hacked. They say customers may experience email account takeovers, SIM swaps, third-party password or breaches of their personal identifiable information.

But you know, it's kind of hard to understand when the company says, on one hand, Coinbase itself has never been hacked. But then you have an account on a platform that is hacked. It's kind of indistinguishable, I think, for these folks who have lost money on the platforms. Guys?

AKIKO FUJITA: So Alexis, what does this mean for recourse for a company like Coinbase? Because it may not have happened yet, but of course, that's got to be a risk maybe investors should be aware of, right?

ALEXIS KEENAN: Yeah. Certainly, yesterday Brian Armstrong, Coinbase's CEO, told CNBC that, look, regulation is right up there with cybersecurity in terms of the risk to these crypto companies. So he's aware of that. He said that he is open to conversations about additional regulation.

But on the flip side of that he said, well, we want to be treated on a level playing field with traditional banks. Now, that of course, is a really tough thing to get your arms around, because the nature of the transactions are not-- can't be likened exactly to fiat assets and others that have been regulated under these long-standing rules. So it will be interesting to see if they can keep a lid on the transactions that are infiltrations.

But so far, these customers are really left out and hanging to dry. I mean, I've talked to customers who have lost hundreds of thousands of dollars at this point. I've talked to attorneys whose clients have lost even millions of dollars. So the stakes are very high.

AKIKO FUJITA: Alexis Keenan, thanks so much for bringing us that story.