Three individuals who purchased crypto through Coinbase filed a class action proposal on March 11 in the Southern District Court of New York alleging that Coinbase is operating as an unregistered stock exchange. The lawsuit lists 79 tokens that it claims are securities that Coinbase is selling in violation of state and federal law, and that they were not advised of the risks involved in such purchases.
The plaintiffs, Christopher Underwood, Louis Oberlander, and Henry Rodriguez, represented by Connecticut law firm Silver Golub & Teitell, filed the amended lawsuit 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 benefits to be derived from the efforts of others.”
Furthermore, the lawsuit says that Coinbase is the “real seller” when a transaction occurs, crediting and debiting the accounts of the parties involved in the transaction, rather than facilitating a direct exchange between those parties.
Phillip Mustakis, attorney for Seward & Kissel, said: “The case is not a huge surprise. After all, the SEC has signaled that it intends to carry out investigations or actions against cryptocurrency exchanges.”
Similar cases 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 brought cases against token issuers, such as its current dispute with Ripple, and against market participants such as BlockFi, offering a digital asset-based lending product, the SEC has yet to take action against an exchange.
Moustakis said that the scrutiny of the tokens exemplifies the need for more regulatory clarity. “Unless and until the SEC provides further guidance and an enforcement pathway for issuers of tokens, crypto lending products, exchanges, and other market participants, the question of whether any particular crypto asset or transaction is a value will be litigated one by one”, said.
This is because, “although tests to determine if a token is a value […] are well established, the analysis depends on the facts and circumstances and different evaluators weigh certain factors more than others, so it can give different results depending on the point of view of each one”, said.
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