Coinbase’s New User Agreement: Are Retail Users Being Set Up? Is Your Wallet Safe?

Apr 22, 2025

Fellow Coinbase users and shareholders, I’m writing this as someone who has trusted Coinbase to trade, store, and manage my crypto. But after digging into the latest user agreement and the ongoing patent dispute with Veritaseum Capital LLC, what I’ve found raises questions. This is my personal, non-expert opinion based on publicly available information—a public service announcement about risks that might affect us all. Please read the user agreement yourself and verify my concerns.

The Veritaseum Patent Dispute: A Robust Claim Against Coinbase

The story begins with U.S. Patent No. 11,196,566, granted to Reggie Middleton of Veritaseum in December 2021. This patent covers secure, trustless blockchain transfers without intermediaries—a method, one might argue, powers many Coinbase services, like peer-to-peer trades and staking. Cited by over 140 patent families from giants like NASDAQ, JPMorgan, Wells Fargo, Bank of America, Ripple, and even Coinbase itself, its strength is undeniable. Since then, Middleton has secured six additional patents, further solidifying his IP portfolio.

In September 2022, Veritaseum sued Coinbase for $350 million, alleging infringement across products like Coinbase Pay, its wallet, and staking services. In December 2022, Veritaseum also sued Circle USDC, but due to the untimely death of Middleton’s attorney, these cases were dismissed 'without prejudice', meaning they can be reopened anytime, and therefore remain unresolved. Middleton claims he offered to negotiate but said he was “being disrespected… after a year and a half, counsel said you have to file suit, so we filed suit against Coinbase Global and Circle USDC” (VeriDAO Roundtable). Patent attorney Jonathan Olsen added: “Large entities have a notorious ethic... for disrespecting patents held by smaller entities.” Coinbase, backed by Perkins Coie, tried to invalidate the patent via an Inter Partes Review (IPR2023-00751), but the Patent Trial and Appeal Board (PTAB) denied it, and the Rehearing (IPR2023-00751-P10) for “lack of merit.” With a 70% invalidation rate for instituted IPRs (Unified Patents), this rejection suggests the patent’s resilience—a David triumphing over Goliath.

Yet, Coinbase has continued expanding services like its Smart Wallet and decentralized applications (DApps), which one could argue aligns with the patented technology. As a user, I’m left wondering: are my transactions putting me at risk?

The User Agreement: A Technical Split with Legal Consequences

I reviewed Coinbase’s U.S. User Agreement (updated April 10, 2025) and found two distinct technical flows for retail users, each with different infringement implications:

Hosted (Custodial) Wallets: Here, Coinbase controls private keys and signs transactions. Under the Federal Circuit’s Centillion test, users merely issue instructions—not enough to be direct infringers. No direct infringement means no induced infringement by Coinbase.
Smart Wallet/Self-Custody Flows: This is where it may get troubling. With Smart Wallet, users sign and broadcast transactions themselves, mirroring Middleton’s patented “inchoate-then-complete record” method (’566 Claim 1, dependent claims 3/5).

Steps include:

Fetching quotes from oracles (elements a-b).
Building a UserOperation (element c).
Signing with a passkey (element d).
Querying chain state (element e).
Broadcasting the complete record (element f).

This appears to match the '566 patent but an expert would be better to confirm. Per Centillion, users “control and benefit” from each step, which from my layman's understanding makes users direct infringers. Coinbase’s tutorials, SDKs, and “one-click swap” UI then satisfy the knowledge and intent prongs of induced infringement under 35 U.S.C. § 271(b) (Global-Tech standard).

Induced Infringement: Coinbase’s Role and User Exposure

Here’s my concern: This raises questions if Coinbase may be inducing users to infringe by encouraging Smart Wallet use post-litigation, knowing the patent stands strong after the IPR denials. The company provides tools and guidance, potentially turning users into direct infringers, without warning them. Veritaseum likely targets Coinbase, not individuals, but the user agreement suggests Coinbase may have the ability to shift the burden.

Consider:

Legal Risk: If Veritaseum pursues Coinbase, could Smart Wallet users face injunctions or damages?
Coinbase’s Push: Despite the lawsuit and IPR loss, Coinbase promotes self-custody features, amplifying exposure.

This might be worth exploring. In my view, Coinbase benefits from user activity while potentially leaving users vulnerable.

The Indemnity Trap: Passing Liability Illegally?

The user agreement’s indemnity clause is an eye opener: users must “indemnify and hold Coinbase harmless” from claims, including third-party IP disputes (§ 8.1). If Veritaseum sues over Smart Wallet transactions, could Coinbase argue I owe them legal costs—even if they induced me to infringe? Other agreements (e.g., Decentralized-Protocol Integration ToS § 5) echo this, covering Smart Wallet use.

Why Coinbase Might Invoke the Indemnity Clause:

Direct-Infringement Predicate: When a retail user signs and broadcasts an ERC-4337 UserOperation in Smart Wallet, they personally perform every step of Middleton’s patented method. If Veritaseum sues Coinbase for inducement, Coinbase can point to the user as the direct infringer and shift defense costs via the contractual indemnity in the updated user agreement (April 10, 2025). This may positions users as the frontline actors, potentially shielding Coinbase from full liability.
Arbitration Funnel: All Coinbase contracts—including the main user agreement, Coinbase Wallet terms, and others—force disputes into individual arbitration with batch-fee limits. This dramatically reduces Coinbase’s exposure to mass claims while preserving its right to recover legal fees from users. Even if hundreds of users were implicated, they’d each face separate, costly arbitration battles, discouraging resistance.

Every version of Coinbase’s consumer-facing contracts contains a blanket indemnity clause that, on its face, requires retail users to reimburse Coinbase if a patent holder sues the exchange and names the user’s on-chain activity as direct infringement. For example, if our Smart Wallet transaction triggers a lawsuit, Coinbase could demand we cover their legal bills—despite them providing the tools and marketing the feature.

Indemnify - "to pay or promise to pay someone an amount of money if they suffer damage or loss." (per Cambridge Dictionary)

The Legal Loophole:

Here’s the twist—California law, which governs these contracts, may render this unenforceable. Per Cal. Civ. Code § 2773, indemnity for acts “known to be unlawful” is void. If Coinbase’s inducement is proven willful (Global-Tech: knowledge + intent), courts like Rooz v. Kimmel (55 Cal. App. 4th 573) which involved negligence not known to be unlawful at the time, and commentary from legal experts (Justia Law, Jones Day) suggest users might not have to pay. Once “active inducement” by Coinbase is established, California’s statutory and common-law limits bar indemnity for the company’s own misconduct. Yet, Coinbase buries this possibility, forcing users into its mandatory arbitration framework (Appendix 5) to fight it—a process tilted toward the company (Investopedia).

On Paper vs. In Practice:

On paper: You agree to indemnify Coinbase for patent lawsuits tied to your on-chain behavior, even when Coinbase writes the code and markets the feature.
In practice: That promise is shaky if Coinbase’s knowing inducement is proven, as California law makes such indemnities void. But the arbitration hurdle remains a costly barrier, ensuring users face an uphill battle to challenge it.

This setup raises potential issues. California law might limit enforcement but one could argue Coinbase is banking on arbitration to deter challenges. Is this legal? As a user, I’d be stuck with legal fees, even if I win.

Mandatory binding arbitration - "is a private proceeding used to settle disagreements between two parties - has been criticized for denying consumers their rights and for being controlled by, and biased towards, corporate defendants." (per Investopedia)

Shareholder Risks: A Billion-Dollar Blind Spot

As a shareholder, I would be equally worried. Coinbase’s SEC filings (10-K, 10-Q) seem to omit the IPR denials with the potential of treble damages—up to $1 billion if willful infringement is found. Could this silence breach disclosure rules under the Securities Exchange Act? Other red flags:

No Freedom to Operate (FTO): No evidence Coinbase assessed patent risks post-IPR, despite expanding Smart Wallet.
Selective Protections: Do institutional clients like BlackRock have better terms, leaving retail users exposed?

A loss to Veritaseum could mean settlements, injunctions, or service disruptions, and effecting COIN’s value. Shareholders deserve transparency—Coinbase’s fiduciary duty demands it.

My Two Cents

I joined Coinbase for crypto’s promise, not to be a legal pawn. With Veritaseum’s patent holding firm and Coinbase’s agreement appearing questionable, are users potentially at risk? I understand Middleton is simply trying to protect his Intellectual Property from unlicensed commercial use in attempting to collaborate—“I reached out first...after a year and a half, counsel said I have to file suit” (VeriDAO Roundtable)—but Coinbase’s response might cost us. Users face infringement risks; shareholders face financial uncertainty. Coinbase should clarify these concerns.

A Note on Open Source and Patents

There’s a misconception that open-source software is free from IP constraints. While open-source licenses cover copyrights, they don’t address patents. Companies holding patents on tech in open-source projects can still enforce them, requiring licenses for "commercial use." This balance has historically driven innovation, as seen in mobile phones and the internet, where patented tech was safely built upon, fostering growth.

https://savetheinventor.com/get-the-facts/

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Apr 29

Coinbase has issued the following reply on their Reddit channel under the topic of their new user agreement as a reply to a user sharing the article above.

Do Your Own Due Diligence

https://www.reddit.com/r/CoinBase/comments/1k73n0n/coinbase_new_user_agreement/?share_id=46lUkptYW5pHAbnmEaR4W&utm_medium=ios_app&utm_name=iossmf&utm_source=share&utm_term=14

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