Three individuals who bought cryptocurrency through Coinbase filed a proposed class action in New York’s Southern District Court on March 11, alleging that Coinbase operates as an unregistered stock exchange. The lawsuit lists 79 tokens it claims are securities Coinbase is selling in violation of state and federal law, and the buyers were not warned of the risks of their purchases.
The plaintiffs, Christopher Underwood, Louis Oberlander and Henry Rodriguez, represented by Connecticut law firm Silver Golub & Teitell, have filed the amended complaint, naming Coinbase Global, Coinbase and CEO Brian Armstrong as defendants. The 255-page document argues, for each token in question, that it qualifies as securities under the Howey test as “investment of money in a joint venture with a reasonable expectation of profit derived from the efforts of others.”
In addition, the suit says Coinbase is the “real seller” when an exchange takes place, crediting and debiting the parties involved in the transaction to 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, as the SEC has signaled that it plans to continue investigations or actions against crypto exchanges.”
Similar instances arose after the Securities and Exchange Commission, or SEC, began cracking down on initial coin offerings in 2018, Moustakis said. While the SEC has filed cases against token issuers, such as the current dispute with Ripple, and market participants such as BlockFi, which offered a loan product based on digital assets, the SEC has not yet taken action against an exchange.
Moustakis said the meticulous 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, whether a particular crypto asset or transaction is a security will be litigated one by one,” he said. 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 reviewers weigh certain factors more than others, so it can produce different results depending on one’s point of view,” he said.