Coinbase Faces New Class Action Lawsuit Over Unregistered Securities

A group of Coinbase investors has filed a class lawsuit against the crypto exchange and its CEO, Brian Armstrong, alleging they were misled into buying unregistered crypto asset securities on the exchange.

Legal troubles seem to be mounting for Coinbase as investors claim deception.

According to a filing dated May 3, 2024, the plaintiffs claimed that Coinbase intentionally violated state securities laws by selling securities tokens (investment contracts), including Solana (SOL), Polygon (MATIC), Near Protocol (NEAR), Decentraland (MANA), Algorand (ALGO), Uniswap (UNI), Tezos (XTZ), and Stellar (XLM) without proper registration.

More Problems In The US Crypto Market

The investors noted that Coinbase referred to itself as a “Securities Broker” in its user agreement. This strengthens the plaintiffs’ arguments the exchange intended to operate within the securities framework. Similarly, Coinbase Prime, a full-service brokerage platform designed for institutional investors, is claimed to be a securities broker.

With this filing, the investors seek compensation for their losses and an injunction to stop Coinbase from selling these tokens.

This is not the first time the crypto exchange has been accused of selling and buying unregistered securities. In March 2022, three investors sued the exchange for violating federal securities law. The lawsuit also listed 79 tokens the plaintiffs claimed were unregistered securities.

Problems Are Coming

Earlier in April this year, a court ruling decided that cryptocurrencies traded on Coinbase did not violate the Securities Exchange Act. Coinbase argued these are secondary market transactions, where users buy from each other, not directly from the exchange.

It’s unclear whether the exchange will pursue a similar defense strategy in the latest class lawsuit. The team might also seek to claim that those listed tokens shouldn’t be subject to the same regulations.

It’s worth noting that this lawsuit is a separate legal battle with the US Securities and Exchange Commission(SEC). However, all these cases center around whether crypto tokens sold on Coinbase qualify as securities and if the exchange needs to comply with securities regulations.

The new filing follows Coinbase’s Q1/2024 report, published last week. The exchange had a strong first quarter, with total revenue of $1.6 billion and net income exceeding $1 billion, outperforming its 2023 results.

The report showed Coinbase’s Q1 strong growth across different segments. For instance, Coinbase’s consumer transaction revenue doubled, institutional transaction revenue grew by 133%, and Coinbase Prime saw a 105% increase in trading volume in the quarter.

Crypto Prices Are Up

Positive market performance, the launch of spot Bitcoin exchange-traded funds (ETFs) in the US, and a surge in trading activity were key factors in their success. Coinbase’s role as custodian for Bitcoin ETFs undoubtedly boosted its custodial services revenue, which jumped 64% to $32 million.

However, despite positive financials, concerns arise that the ongoing legal hurdles could affect the company’s long-term performance.

The new lawsuit also represents the ongoing debate about crypto regulation, particularly how tokens are classified. Coinbase repeatedly requests the US securities agency to provide clear, proper regulations on crypto as the current lack of regulatory transparency creates uncertainty for investors and businesses in the crypto space.

According to the latest developments in the Coinbase-SEC case, a US court rejected Coinbase’s motion to dismiss the SEC’s lawsuit in March. The court agreed that the SEC had enough evidence to support this claim.

The court also sided with the SEC regarding Coinbase’s staking service. The judge ruled that this service could be considered a security, similar to an investment contract. This could have implications for how Coinbase operates this service.

However, the court found no connection between Coinbase’s wallet product and securities. Coinbase’s chief legal officer confirmed that the company was prepared for that decision and would continue to fight.

Additionally, in April, pro-XRP lawyer John Deaton, representing over 4,700 Coinbase customers, filed a document supporting Coinbase’s appeal.

In addition to Coinbase, other crypto entities like Kraken, Binance, Uniswap Labs, and Consensys are also facing lawsuits from the SEC. All vow to contest the agency’s legal action.

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