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March 17, 2022

Coinbase is being sued in a class action lawsuit again

Three people who purchased cryptocurrency through Coinbase filed a proposed class action in the Southern District Court of New York on March 11 alleging that Coinbase is an unregistered securities exchange. The lawsuit lists 79 tokens as securities that Coinbase is selling in violation of state and federal law, and buyers were not warned of the risks involved in their purchases.

The plaintiffs, Christopher Underwood, Louis Oberlander, and Henry Rodriguez, were represented by the Connecticut law firm Silver Golub & Teitell when they filed the amended complaint, which named Coinbase Global, Coinbase, and CEO Brian Armstrong as defendants. The 255-page document argues that each token in question qualifies as a security under the Howey test as investment of money in a common enterprise with a common purpose.

Furthermore, the suit claims that when an exchange occurs, Coinbase is the “actual seller,” crediting and debiting the parties involved in the transaction in its accounts rather than facilitating a direct exchange between those parties.

“The case is not surprising,” said Philip Moustakis, counsel at Seward & Kissel. After all, the SEC has indicated that it intends to conduct investigations or take action against cryptocurrency exchanges.”

Similar cases arose after the Securities and Exchange Commission, or SEC, cracked down on initial coin offerings in 2018, according to Moustakis.

However, while the SEC has pursued cases against token issuers, such as its current dispute with Ripple, and market participants, such as BlockFi, which offered a lending product based on digital assets, it has yet to take action against an exchange.

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The painstaking one-by-one examination of the tokens, according to Moustakis, exemplifies the need for greater regulatory clarity. “Unless and until the SEC provides additional guidance and a path to compliance for token issuers, crypto lending products, exchanges, and other market participants,” he said, “the question of whether any particular cryptoasset or transaction is a security will be litigated one at a time.”

This is because, while the tests for determining whether a token is a security […] are well established, the analysis is based on facts and circumstances, and different evaluators weigh different factors more heavily than others, so the results can vary depending on one’s point of view.