Three people who bought cryptocurrency through Coinbase filed a class action lawsuit in the Southern District of New York on March 11, alleging that Coinbase operates as an unregistered stock exchange. The lawsuit lists 79 tokens claiming to be securities sold by Coinbase in violation of state and federal laws, and buyers were not warned of the risks associated with their purchases.
The plaintiffs, Christopher Underwood, Louis Oberlander and Henry Rodriguez, representatives of Connecticut law firm Silver Golub and Tetel, filed an amended complaint, appointing Coinbase Global, Coinbase and CEO Brian Armstrong as plaintiffs. The 255-page document separately discusses for each linked token that it qualifies as a security under the Howey test as “investing money in a joint venture with a reasonable expectation that profits will come from the efforts of others.”
In addition, the case states that Coinbase is the “actual seller” when an exchange occurs and credits and debits the parties involved in the transaction to their accounts, rather than facilitating a direct exchange between those parties.
“This case is not too surprising,” said Philip Mostakis, a consultant at Seward & Kissel. “Eventually, the Securities and Exchange Commission (SEC) has indicated that it intends to investigate or take action against cryptocurrency exchanges.”
Mostafa said cases like this arose after the SEC began cracking down on ICOs in 2018. The SEC has yet to take action against the exchange.
Moustakis said the painstaking case-by-case investigation into tokens demonstrates the need for greater regulatory clarity. “Unless the SEC provides additional guidance and a way to comply with token issuers, crypto-lending products, exchanges, and other market participants, whether a particular crypto asset or transaction represents security will be decided one by one,” he said. .
This is because “while the tests to determine whether a token is a security […] are well established, the analysis is based on facts and circumstance, and different evaluators value some factors more than others, so it may give different results depending on the extent said person”.