Coinbase Wins Dismissal of Customer Class Action Lawsuit, Stock Surges

Lawsuit alleged crypto token sales were unregistered securities offerings

Coinbase billboard sign

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Shares of cryptocurrency exchange Coinbase (COIN) surged more than 28% on Thursday, a day after dismissal of a customer class action lawsuit alleging that it sold cryptocurrency tokens through unregistered securities offerings.

Key Takeaways

  • Coinbase had a customer class action lawsuit against it thrown out Wednesday by a federal judge in New York.
  • Disgruntled Coinbase customers argued in the suit that sale of cryptocurrency tokens on the exchange was akin to an unregistered securities offering.
  • The U.S. district court hearing the case relied on Coinbase's user agreement to decide that the crypto exchange wasn't the direct seller of the tokens.
  • Binance, a rival crypto exchange, won a dismissal in a similar case last year.

Coinbase Had No Direct Role in Token Sales

Customers of Coinbase crypto exchange filed the suit under federal securities laws and accused the exchange of acting as an "intermediary," making it the "actual seller" of the tokens.

Despite allegations that the exchange promoted tokens by highlighting their "purported value proposition" and participating in "airdrops," Judge Paul Engelmayer of the U.S. District Court of the Southern District of New York ruled that Coinbase had no direct role in the transactions.

A crypto airdrop is a marketing strategy that involves sending free coins or tokens to wallet addresses of members of the blockchain community, sometimes in return for a small service, such as retweeting a post sent by the company issuing the currency.

Judge Engelmayer relied on Coinbase's user agreement, which said users were neither buying nor selling digital assets from the exchange and that "at all times" the title of those assets remained with the user.

The ruling follows a similar dismissal of a case against rival exchange Binance in March 2022, which was also cited in the Coinbase dismissal.

The lawsuit has been dismissed with prejudice at the federal level, but without prejudice at the state level, leaving the plaintiffs an option to pursue the matter before state courts.

Coinbase stock price chart Feb. 2, 2023


Crypto as Securities Debate Continues

The Coinbase lawsuit, filed in October 2021, alleged that 79 digital assets listed on the exchange matched the definition of securities under federal law and that they violated the law by selling the tokens without registration.

This lawsuit, for the sake of argument, considered cryptocurrency tokens as securities. But the debate over whether cryptocurrencies should be regulated under federal securities laws rages on, partly fueled by such litigation.

The question first arose in the U.S. in December 2020, when the Securities and Exchange Commission (SEC) brought a lawsuit against Ripple (XRP) and its executives for selling unregistered securities offerings. That case is still in progress.

The Bottom Line

Coinbase likely will breathe a sigh of relief with the latest lawsuit dismissal, but the SEC may take a different attitude toward the broker-dealer definition for the crypto marketplace. SEC Chairman Gary Gensler has said that "most" cryptocurrencies are securities, and intermediaries should "have to register with the SEC in some capacity."

Reacting to the Coinbase case dismissal on Twitter on Thursday, attorney and former SEC Branch Chief Lisa Braganca said the judge in the Coinbase lawsuit, "did not agree with the SEC take on what constitutes operating as an unregistered broker-dealer and offering unregistered securities."

Article Sources
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  2. Court Listener. "NYSD.567851.07," Page 16.

  3. Davis Polk. "Binance Securities Litigation Dismissal."

  4. Court Listener. "NYSD.567851.07," Page 8.

  5. SEC. "Kennedy and Crypto."

  6. Twitter. Former SEC Branch Chief Lisa Braganca. "Lisa Braganca Feb. 2, 2023."

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