The class action names 79 crypto assets that are allegedly securities and were sold by Coinbase.
It claims every user who lost money on these assets should be reimbursed for the losses.
Three Coinbase users are accusing the company of selling unlicensed securities and are seeking at least $5 million on behalf of themselves and everyone else who purchased Dogecoin, Solana, Cardano, or more than 70 other tokens on the platform.
The users claim that, since Coinbase is allegedly selling securities (also known as investment contracts) the company should have registered with the SEC as a national securities exchange—a designation typically reserved for stock exchanges, and one that would subject Coinbase to a raft of regulatory and reporting obligations.
According to the Coinbase users who filed the suit, they and everyone else who bought the tokens in question should be compensated for any losses they suffered while trading, and for other unspecified damages. They claim Coinbase is violating both federal and state securities laws, and are also asking the judge to order the company to stop the selling the tokens, which also include Chainlink, Polygon, and Shiba Inu.
The lawsuit, which also names CEO Brian Armstrong as a defendant, quotes a recent a speech by SEC Chairman Gary Gensler that likened crypto to the Wild West, and suggested that it was likely exchanges like Coinbase were offering unlicensed securities.
While all of this could, in theory, pose an existential threat to Coinbase’s business, it’s unclear how much traction the lawsuit will get, especially as similar lawsuits have flamed out in the past. Last April, for instance, at least seven class action lawsuits against crypto exchanges were thrown out by the courts or else withdrawn by plaintiffs.
As with many securities law class action lawsuits, the new Coinbase one is being driven by a law firm. Late last year, the firm advertised that they would file such a lawsuit, asking for Coinbase customers who would be willing to serve as lead plaintiff—a designation that requires putting one’s name on the case and, in return, receiving a higher payout if the defendant loses or settles.
These type of lawsuits, which almost never go to trial, amount to a gamble by the law firms, which typically seek a payout to go away. In those cases, the resulting settlement usually involves a hefty payment for lawyers and little or nothing for the customers who are the nominal victims in the suit.
Whatever its merits, however, the new lawsuit does serve to highlight the legal exposure Coinbase faces as a result of its decision to aggressively list dozens of new tokens even as the legal status of those tokens was unclear. While SEC officials have suggested that Bitcoin and Ethereum are not securities and don’t need to be registered with the agency, that’s not the case with the thousands of other crypto assets that trade everyday—some of which clearly are securities, and some of which are in a grey area.
Coinbase declined to comment on the new lawsuit.
The best of Decrypt straight to your inbox.
Get the top stories curated daily, weekly roundups & deep dives straight to your inbox.