Class action suit against Coinbase alleges unregulated securities sales

Plaintiffs say 79 tokens that Coinbase sells meet the definition of securities, but they were not warned of their risks.

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

The plaintiffs, Christopher Underwood, Louis Oberlander and Henry Rodriguez, represented by Connecticut law firm Silver Golub & Teitell, filed the amended complaint naming Coinbase Global, Coinbase and CEO Brian Armstrong as defendants. The 255-page document argues separately for each token in question that it qualifies as a security under the Howey test as “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

In addition, the suit says Coinbase is the “actual seller” when an exchange takes place, crediting and debiting the parties involved in the transaction in its accounts, rather than facilitating a direct exchange between those parties.

Philip Moustakis, counsel at Seward & Kissel, said, “The case is not much of a surprise. After all, the SEC has signaled that it intends to pursue investigations or actions against crypto-exchanges.”

Similar cases that arose after the Securities and Exchange Commission, or SEC, began cracking down on initial coin offerings in 2018, Moustakis said. 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, the SEC has not yet taken action against an exchange.

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

This is because, “While the tests to determine whether a token is a security […] are well established, the analysis depends on facts and circumstances and different evaluators weigh certain factors more than others, so it can yield different outcomes depending on one’s point of view,” he said.