Coinbase Hit With Lawsuit Over Unregistered Securities—What’s Next?

Prominent crypto exchange Coinbase is set to face a class-action lawsuit by some customers over accusations of selling securities as an unregistered dealer-broker. This latest development comes amid the exchange’s interlocutory appeal in an ongoing case with the US Securities and Exchange Commission (SEC).

Judge Rules Against Coinbase, Rejects Motion To Dismiss

On February 7, Reuters reported that US District Judge Paul Engelmayer of Manhattan has ruled that Coinbase must face trial over allegations of operating as an unregistered broker in the sale of 79 tokens viewed as securities by a group of customers.

Judge Engelmayer rejected the defendant’s argument of not being a “statutory seller” under the US securities laws because it never directly transferred titles of all tokens acquired by these customers. Rather the district Judge highlighted that Coinbase was indeed a direct seller, as customers on their platform are said to transact with only “Coinbase itself.”

Interestingly, this case was initially dismissed by Judge Engelmayer in February 2023. However, a 2nd US Circuit Court of Appeals in Manhattan revived the lawsuit due to the initial ruling’s reliance on a December 2021 user agreement. Following Engelmayer’s most recent verdict, the American exchange prepares for a potentially intense legal battle. So far Coinbase has claimed not to “list, offer, or sell securities on its exchange” expressing all readiness to clear its name in the district court.

During ongoing legal challenges, Coinbase is also facing a more serious lawsuit from the SEC, which accuses the exchange of acting as an unregistered broker-dealer and illegally selling unregistered securities through its staking program.

Currently, this case is on hold as Coinbase successfully secured an ongoing interlocutory appeal questioning the application of the Howey test to digital assets under the US securities law. A favorable ruling for the American exchange in this appeal could mean that crypto sales do not qualify as securities transactions thereby undermining the SEC’s claim in this case and many other crypto-related lawsuits.

A Potential $1 Trillion Company?

In other news, Bitwise Chief Investment Officer and popular crypto figure Matt Hougan has theorized that Coinbase could become a $1 trillion company.

Hougan explains that the anti-crypto stance under the past US administration created a regulatory moat around Coinbase resulting in high margins amid few competitors. However, the exchange’s battle with regulators under that “harsh” regime has now positioned the firm as a potential industry leader in this pro-crypto regulatory environment.

The Bitwise CIO backs Coinbase’s potential to become a major financial titan if it maintains its current mode of operation amid a blooming crypto market. At press time, total crypto market cap is valued at $3.09 trillion with a 0.08% gain in the past day.

Featured image from Shutterstock, chart from Tradingview