Federal Appeals Court Reinstates Class-Action Lawsuit Against Coinbase Over Alleged Securities Violations

A federal appeals court has revived a lawsuit against Coinbase, the largest U.S. cryptocurrency exchange, filed by customers who allege that the company sold unregistered securities and failed to register as a broker-dealer. The court ruled that a lower court judge should not have relied on a user agreement to dismiss the case, as the agreement had been materially changed over time and was not accepted by all customers.

Federal Appeals Court Revives Class-Action Lawsuit Against Coinbase for Alleged Securities Violations

New York, USA - In a significant development, the 2nd U.S. Circuit Court of Appeals has revived a class-action lawsuit filed by Coinbase customers, overturning a lower court ruling that had dismissed their claims. The lawsuit alleges that Coinbase, the largest cryptocurrency exchange in the United States, illegally sold unregistered securities and failed to register as a broker-dealer.

The appeals court's unanimous 3-0 decision overturned the dismissal order issued by U.S. District Judge Paul Engelmayer in February 2023. Engelmayer had ruled that Coinbase was not liable because it did not hold title to or sell the disputed tokens. However, the appeals court found that the district court had placed undue reliance on a user agreement adopted by Coinbase in December 2021.

"The district court found that Coinbase was not a seller because the December 2021 user agreement stated that Coinbase did not hold title to or sell the digital assets," the appeals court wrote in its opinion. "However, the district court erred by relying on the December 2021 user agreement without considering the prior user agreements that Coinbase had in place."

The appeals court pointed out that Coinbase had made material changes to its user agreements over time and that the December 2021 version was not determinative of the company's liability. The court also noted that the plaintiffs had alleged that they never agreed to the December 2021 user agreement, rendering it irrelevant in the context of the case.

The decision by the appeals court allows the class-action lawsuit to proceed, with the case being remanded back to Judge Engelmayer for further proceedings. The plaintiffs, represented by Jordan Goldstein, have expressed gratitude for the decision and intend to pursue their case against Coinbase and its CEO, Brian Armstrong.

Meanwhile, Coinbase's chief legal officer, Paul Grewal, welcomed the dismissal of some claims in the lawsuit, particularly those seeking to rescind customer transactions under the Securities Exchange Act. Grewal emphasized the importance of contracts in the digital asset market and the need for clear rules governing the trading of such assets.

The latest development comes amidst a broader regulatory crackdown on cryptocurrency companies in the United States. Just recently, U.S. District Judge Katherine Polk Failla denied Coinbase's motion to dismiss a separate lawsuit filed by the Securities and Exchange Commission (SEC). The SEC alleged that Coinbase improperly facilitated the trading of unregistered securities in the form of certain tokens.

The revived class-action lawsuit against Coinbase is a significant milestone in the ongoing legal battle over the regulation of cryptocurrencies. The outcome of the case could have far-reaching implications for the cryptocurrency industry and the rights of investors in this emerging market.