Holdout Exchanges Must Promptly Deliver ETC to Their Customers
Abstract: The Ethereum hard fork has created two Ethereum blockchains and two forms of Ether tokens. The exchanges that have not yet distributed to their customers Ether tokens for the Ethereum Classic blockchain are already risking substantial legal consequences.
The successful implementation of the Ethereum hard fork to remedy the exploitation of the DAO created a new blockchain without disturbing the old blockchain. As a result, there are currently two blockchains and all of the Ether that existed as of when the hard fork was implemented exists on both chains. The Ether on the new blockchain uses the symbol “ETH,” since there was a consensus among Ethereum miners to adopt the hard fork, while the Ether on the original blockchain, now termed “Ethereum Classic” uses the symbol ETC.
Ethereum Classic continues to have support in the portion of the Ethereum community that believes that a blockchain must be 100 percent immutable, regardless of any injustices that may occur. As this is not an insignificant portion of the community, there has been a robust market for ETC. At times this week, ETC was trading near $3.00. While many thought that the original blockchain would not receive any support subsequent to the hard fork, because it has and ETC has real value, several of the major virtual currency exchanges have reacted swiftly to deliver the ETC to their customers that corresponds to the ETH that existed as of the time of the hard fork. Poloniex, Kraken, and Bitfinex have already delivered this matching ETC to their customers and are also supporting ETC trading.
Other exchanges, however, have yet to make ETC available to their customers. While Gemini and GDAX appear to be willing to eventually allow their customers to withdraw the amount of ETC that corresponds to their ETH balances at the time of the hard fork, neither exchange has committed to a specific date by when they will do it. Moreover, it is unclear whether these exchanges plan to support ETC trading. For example, Gemini states on its website: “We have not yet decided whether to open matching engines for ETC trading.” GDAX also does not have plans to support ETC trading. Coinbase started trading Ether on July 21, 2016, the day after implementation of the hard fork, so it does not possess ETC that rightfully belongs to its customers. Nevertheless, Coinbase, which operates GDAX, has stated that, “At this time, Coinbase has no plans to support ETC.”
Any inaction by the exchanges in providing the ETC to their customers is likely a breach of fiduciary duty and conversion of their customers’ property. None of this ETC belongs to the exchanges, yet their customers are powerless to obtain it. The exchanges have complete control over this ETC because they have control over the wallets that held their customers ETH on the Ethereum Classic blockchain immediately prior to the hard fork and those wallets now hold all of the corresponding ETC.
This circumstance is analogous to a corporate spin-off or “starbursting,” a term used to describe the process of spinning off the pieces of a large corporation into various independent entities in order to focus on long-term growth of the core business. The United States Securities and Exchange Commission defines a “spin-off” as when “a parent company distributes shares of a subsidiary to the parent company’s shareholders so that the subsidiary becomes a separate independent company. The shares are usually distributed on a pro rata basis.” Obviously, a corporation could not spin-off valuable businesses without providing existing shareholders with value for the spun-off businesses. Exchanges that fail to timely provide their customers with the ETC may be creating massive liability for themselves, as they are depriving their customers of a readily tradeable asset. While these exchanges are well within their rights not to offer ETC trading, they have absolutely no right to withhold ETC that rightfully belongs to their customers. Thus, it is imperative that all exchanges that have not already done so immediately deliver the ETC to their customers that corresponds to the ETH held at the time of the hard fork.
We have reached out to both Gemini and GDAX (Coinbase) for a comment, but as of publishing we have not received a reply. If we hear back, we will update this story accordingly.