Cryptocurrency exchange in hot water amidst groundbreaking legal battle.
By Jonathan Stempel
NEW YORK (Reuters) – A federal judge ruled on Friday that Coinbase, the largest U.S. cryptocurrency exchange, must confront a lawsuit filed by customers who alleged the illegal sale of securities without registering as a broker-dealer. U.S. District Judge Paul Engelmayer in Manhattan rejected Coinbase’s claim that it did not meet the criteria of a “statutory seller” under federal securities law since it never transferred ownership of the 79 tokens traded by customers. The judge referenced the accusation that “customers on Coinbase engage in transactions solely with Coinbase itself,” leading to the determination that Coinbase acted as a seller. Engelmayer also declined to dismiss claims under the laws of California, Florida, and New Jersey, stating that customers adequately asserted that Coinbase directly sold the tokens. “Coinbase does not list, offer, or sell securities on its exchange,” Coinbase stated in response. “We anticipate vindicating the remaining claims in the district court.” Attorneys representing the customers did not immediately respond to requests for comment. Engelmayer had initially dismissed the lawsuit in February 2023, but the 2nd U.S. Circuit Court of Appeals in Manhattan revived certain aspects of it in April. The recent ruling allows those sections to move forward. Customers are seeking unspecified damages. The U.S. Securities and Exchange Commission has also brought a lawsuit against Coinbase, alleging that the exchange unlawfully allowed the trading of tokens that should have been registered as securities. Last month, another federal judge in Manhattan postponed that case so Coinbase could promptly seek input from the 2nd Circuit on whether, according to a Supreme Court precedent from 1946, digital token trades were considered investment contracts necessitating regulation as securities. In a court filing on Jan. 17, Coinbase informed the appeals court that its decision could help “clear away the cloud that currently hangs over the cryptocurrency market.” The case is Underwood et al v Coinbase Global Inc et al, U.S. District Court, Southern District of New York, No. 21-08353. (Reporting by Jonathan Stempel in New York, Editing by Louise Heavens)
