rypto exchange Coinbase is no stranger to legal issues, and now faces another class action lawsuit alleging the company misled investors. Filed on April 25, 2022, in the US District Court for Northern California, the complaint represents six plaintiffs from California and Florida. At the heart of the matter are accusations that Coinbase violated state securities laws in its sales of various digital assets.
Background on Securities Allegations
This is not the first time Coinbase has faced questions about whether assets sold on its platform should be deemed securities under US law. The company is already engaged in ongoing litigation against the Securities and Exchange Commission (SEC). In that case, the SEC signaled it believes Ethereum (ETH) and other assets sold unregistered by Coinbase met the criteria of securities.
For its part, Coinbase has consistently maintained that assets sold via secondary markets like its own are not securities. The exchange argues factors like decentralization and market performance remove digital currencies from being investment contracts subject to regulation. However, regulators disagree with this interpretation and are pushing back against the burgeoning crypto industry.
Details of the Latest Lawsuit
Specifically, this new class action lawsuit names Solana (SOL), Polygon (MATIC), Near Protocol (NEAR), Decentraland (MANA), Algorand (ALGO), Uniswap (UNI), Tezos (XTZ) and Stellar Lumens (XLM) as securities allegedly sold in violation of the law. The complaint claims these cryptos meet the definition of securities according to the Howey Test since investors expected profits based on the development team's efforts.
Additionally, the plaintiffs believe statements in Coinbase's user agreement where it refers to itself as a "Securities Broker" prove the company understood the transactions involved in investment securities. They are seeking full restitution for alleged damages as well as legal changes to prevent further violations of this nature. It's currently unknown how long the legal process may take to resolve these new securities accusations.
Regulatory Implications Are Large
Regardless of the ultimate legal outcomes, cases like this indicate regulators are gaining strength in their view of crypto as a securities market. If Coinbase or other major exchanges are found to have routinely broken securities laws, it could undermine the argument that digital currencies should not be regulated similarly to traditional finance. Huge penalties or settlement costs would seriously hurt businesses like Coinbase.
With billions at stake across the crypto economy, the definition of a security takes on outsized importance. Industry leaders are eager to avoid smothering regulation, while watchdogs aim to prevent harming consumers. How courts balance these priorities in high-profile tests like with Coinbase will guide future regulatory frameworks in the United States and beyond. For now, this new lawsuit ensures the debate over crypto's status remains unresolved and legally complicated.
