Coinbase, the largest U.S. cryptocurrency exchange, is facing a lawsuit from customers alleging the illegal sale of unregistered securities, according to a recent ruling by a federal judge. U.S. District Judge Paul Engelmayer in Manhattan rejected Coinbase’s defense that it wasn’t a “statutory seller” under federal securities law because it never transferred ownership of the 79 tokens traded by customers. The judge cited the allegation that Coinbase customers transact exclusively with the platform itself, leading to the conclusion that Coinbase acted as the seller.
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Court Denies Dismissal of State Law Claims
Judge Engelmayer also refused to dismiss claims brought under the laws of California, Florida, and New Jersey. He stated that the customers sufficiently alleged Coinbase’s role as a direct seller of the tokens in these states. Coinbase maintains that it does not list, offer, or sell securities on its exchange and expressed confidence in vindicating the remaining claims in district court. Lawyers representing the customers have not yet provided comment.
Lawsuit Revival and SEC Involvement
This lawsuit was initially dismissed in February 2023 but was partially revived by the 2nd U.S. Circuit Court of Appeals in Manhattan last April. Friday’s decision allows those revived portions of the case to proceed, with customers seeking unspecified damages. Adding to Coinbase’s legal challenges, the U.S. Securities and Exchange Commission (SEC) has also filed a lawsuit against the exchange. The SEC alleges that Coinbase unlawfully allowed the trading of tokens that should have been registered as securities.
Broader Implications for the Cryptocurrency Market
Last month, a separate federal judge in Manhattan temporarily suspended the SEC case against Coinbase, enabling the exchange to directly appeal to the 2nd Circuit. The core issue of the appeal hinges on whether digital token trades constitute investment contracts requiring regulation as securities, based on a 1946 Supreme Court precedent. In a court filing on January 17, Coinbase argued that the 2nd Circuit’s decision could significantly impact the cryptocurrency market by clarifying the regulatory landscape. The outcome of this case and the related SEC lawsuit could have far-reaching implications for the cryptocurrency industry as a whole. The ongoing legal battles highlight the evolving regulatory scrutiny faced by cryptocurrency exchanges and the need for clearer legal frameworks governing digital asset trading.
The case is Underwood et al v Coinbase Global Inc et al, U.S. District Court, Southern District of New York, No. 21-08353.
