Resurrected Consumer Suit Accuses Coinbase of Unregistered Securities Sales

A US appeals court has revived a 2021 lawsuit against Coinbase Inc., alleging that the cryptocurrency exchange facilitated the sale of unregistered securities. The 2nd US Circuit Court of Appeals reversed a lower court's dismissal of the suit, holding that the district court erred in considering a December 2021 user agreement when earlier versions of the agreement should have been used. The appeals panel remanded the case back to the district court for further proceedings.

Revived Consumer Suit Alleges Unregistered Securities Sales by Coinbase

New York, April 5, 2024 - In a significant reversal, a federal appeals court has revived a consumer lawsuit against cryptocurrency exchange Coinbase Inc., alleging that the company facilitated the illicit sale of unregistered securities. The lawsuit, originally filed in 2021, was dismissed last year by a federal judge in New York. However, the 2nd US Circuit Court of Appeals overturned that decision on Friday, arguing that the dismissal was based on an outdated user agreement.

The three-judge appeals panel noted that Coinbase had updated its terms of service and user agreement since the lawsuit was initially filed. Consequently, the district court had erred in relying solely on the December 2021 user agreement to dismiss the case. The appeals panel has remanded the case back to the district court, instructing the lower court to determine which version of the user agreement should be used in assessing the validity of the plaintiffs' claims.

Central to the revived lawsuit is the allegation that Coinbase sold unregistered securities in the form of certain digital assets traded on its platform. Under federal securities laws, any sale of securities must be registered with the Securities and Exchange Commission (SEC) unless an exemption applies. The plaintiffs contend that Coinbase failed to register these digital assets, rendering their sale unlawful.

The appeals court's decision is a major setback for Coinbase, which had argued that it was merely providing a platform for transactions and was not directly involved in the sale of securities. However, the appeals panel held that the plaintiffs had sufficiently alleged that Coinbase played a significant role in facilitating the sale of the unregistered securities.

The district court is now tasked with further evaluating the plaintiffs' claims and determining which version of Coinbase's user agreement is applicable to the case. The court's decision on these matters will have a substantial impact on the outcome of the lawsuit and potentially on the broader regulatory landscape for cryptocurrency exchanges.

The revived lawsuit serves as a reminder of the ongoing regulatory challenges faced by the cryptocurrency industry. As digital asset markets continue to evolve, regulators and courts will need to grapple with the complex legal issues surrounding the classification and sale of digital assets. The outcome of the Coinbase lawsuit will undoubtedly have significant implications for the future of cryptocurrency regulation in the United States.