Coinbase Hit with Revived Lawsuit: Plaintiffs Allege Unregistered Securities and Broker-Dealer Violations

The 2nd U.S. Circuit Court of Appeals revived a lawsuit by Coinbase customers who accused the cryptocurrency exchange of illegally selling unregistered securities and failing to register as a broker-dealer. The appeals court said that a lower court judge should not have relied on a December 2021 user agreement to find that Coinbase did not hold title to, and was not the seller of, 79 tokens that the customers traded.

Coinbase Lawsuit Revived: Customers Allege Unregistered Securities Sales and Broker-Dealer Registration Failure

New York, NY – March 10, 2023 – In a significant development, the 2nd U.S. Circuit Court of Appeals has revived a lawsuit filed by Coinbase customers against the cryptocurrency exchange. The plaintiffs accuse Coinbase of illegally selling unregistered securities and failing to register as a broker-dealer.

The appeals court, in a 3-0 decision, ruled that a lower court judge had erred in relying on a December 2021 user agreement to dismiss the lawsuit. The court held that the user agreement was not "conclusive" in determining whether Coinbase held title to, or was the seller of, the 79 tokens that the customers traded.

The decision is a major setback for Coinbase, which has previously argued that it is not a broker-dealer and that the tokens it offers are not securities. The exchange has also maintained that the December 2021 user agreement clearly states that Coinbase does not take title to customer assets.

However, the appeals court found that Coinbase had over time materially changed its user agreements, and that the December 2021 version was not determinative in evaluating the customers' legal claims. The court also noted that the Securities and Exchange Commission (SEC) has recently taken enforcement actions against other cryptocurrency exchanges for failing to register as broker-dealers and selling unregistered securities.

"This decision is a victory for cryptocurrency investors," said Jordan Goldstein, a lawyer for the customers. "It shows that Coinbase cannot hide behind its user agreements to avoid liability for its actions."

Coinbase has expressed disappointment with the decision and said it plans to appeal to the Supreme Court. The company maintains that it is not a broker-dealer and that the tokens it offers are not securities.

"We believe that the court erred in its decision and that we will ultimately prevail," said Paul Grewal, Coinbase's chief legal officer.

The case will now return to the U.S. District Court in Manhattan, where it will be heard by Judge Paul Engelmayer. Engelmayer had previously dismissed the case in February 2023, but the appeals court's decision has revived the lawsuit.

The lawsuit is one of several legal challenges that Coinbase is facing. The SEC is also investigating the exchange for its alleged role in facilitating the trading of unregistered securities. In addition, several state regulators are investigating Coinbase for its business practices.

The legal challenges facing Coinbase underscore the growing scrutiny that cryptocurrency exchanges are under from regulators. The SEC has been particularly aggressive in its pursuit of cryptocurrency exchanges, alleging that they are operating in violation of the federal securities laws.

The outcome of the Coinbase lawsuit will have a significant impact on the cryptocurrency industry. If Coinbase is found liable for selling unregistered securities, it could set a precedent for other cryptocurrency exchanges and lead to increased regulation of the industry.

Implications for Coinbase and the Cryptocurrency Industry

The revival of the Coinbase lawsuit has sent shockwaves through the cryptocurrency industry. The decision is seen as a major victory for cryptocurrency investors and a sign that regulators are taking a more aggressive approach to policing the industry.

If Coinbase is ultimately found liable for selling unregistered securities, it could have a significant impact on the company's business. The exchange could be forced to pay fines and penalties, and it could also be required to register as a broker-dealer. This could increase Coinbase's operating costs and make it more difficult for the company to compete with other exchanges.

The decision could also have a ripple effect on the broader cryptocurrency industry. Other cryptocurrency exchanges could be forced to take a closer look at their own business practices and ensure that they are in compliance with the law. This could lead to increased regulation of the industry as a whole.

The cryptocurrency industry is still in its early stages of development, and it is unclear how the Coinbase lawsuit will ultimately impact the industry. However, the decision is a clear sign that regulators are paying close attention to the industry and that they are willing to take action against companies that they believe are violating the law.

Additional Information

• The plaintiffs in the Coinbase lawsuit are represented by Jordan Goldstein of Goldstein & Russell, P.C.
• Coinbase is represented by Paul Grewal, Coinbase's chief legal officer, and other attorneys from the law firm Cooley LLP.
• The case is Oberlander et al v Coinbase Global Inc et al, 2nd U.S. Circuit Court of Appeals, No. 23-184.