in Newswire Published on March 15, 2022

79 Crypto Tokens Sold by Coinbase Are Unregistered Securities, Class Action Alleges [DISMISSED]

Last Updated on February 15, 2023

Underwood et al. v. Coinbase Global, Inc. et al.

Filed: March 11, 2022 ◆§ 1:21-cv-08353

A proposed class action alleges Coinbase has failed to disclose that 79 crypto tokens bought and sold on its platform are, in fact, unregistered securities.

Defendant(s)

Coinbase, Inc. Coinbase Global, Inc. Brian Armstrong

Law(s)

The Securities Exchange Act of 1934

State(s)

New York

February 15, 2023 – Plaintiffs’ Claims ‘Fall Short,’ Coinbase Class Action Dismissed

The proposed class action outlined on this page was dismissed on February 1, 2023.

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In a 27-page opinion and order, U.S. District Judge Paul A. Engelmayer ruled in favor of Coinbase, dismissing the plaintiffs’ federal claims with prejudice and state claims without prejudice.

According to the order, the plaintiffs’ amended complaint—which was submitted on March 3, 2022, and which the defendants moved to dismiss two months later—lacks factual support and contradicts the original filing, “in an apparent attempt to evade dismissal.” Put simply, the plaintiff’s original lawsuit cast Coinbase in a very different light than the amended complaint.

The judge stated that the amended complaint does not provide sufficient proof that Coinbase acts as a buyer’s “direct seller,” nor does it adequately show that the defendants directly solicited the purchase of the tokens at issue.

What’s more, the judge charged that the amended complaint “[strips] away all references to [Coinbase’s] User Agreement,” which is discussed numerous times in the plaintiffs’ original filing and whose terms “flatly contradict the [amended complaint’s] allegations.” In his order, Judge Engelmayer contended that the references to the user agreement were omitted “strategically” to avoid dismissal by the court.

The ruling says that providing the plaintiffs with another opportunity to revise their claims would be “futile.”

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A proposed class action alleges Coinbase has failed to disclose that 79 crypto tokens bought and sold on its platform are in fact unregistered securities.

The 255-page lawsuit claims that Coinbase’s sale of the following tokens, listed by their trade symbols, violates federal and state law given the company’s “centralized” cryptocurrency platforms are not registered as a securities exchange or broker-dealer:

“1INCH, AAVE, ACH, ADA, AGLD, ALGO, AMP, ANKR, ARPA, ATOM, AUCTION, AXS, BAL, BAND, BAT, BNT, BOND, BTRST, CGLD, CLV, COMP, CRO, CRV, CTSI, CVC, DNT, DOGE, DOT, ENJ, EOS, FARM, FET, FIL, FORTH, GNT, GRT, GTC, ICP, IOTX, KEEP, KNC, LINK, LOOM, LRC, MANA, MATIC, MKR, MLN, NKN, NMR, NU, OGN, OMG, ORN, OXT, PLA, POLY, QNT, QUICK, RARI, REN, REP, RLC, SHIB, SKL, SNX, SOL, STORJ, SUSHI, TRB, TRIBE, UMA, UNI, XLM, XRP, XTZ, XYO, YFI, ZRX.”

The suit says that although some digital assets closely resemble Bitcoin or other commodities in that they’re decentralized, others align more closely with traditional securities in that they represent an individual’s investment in a project that is to be undertaken with funds raised through the sale of tokens. Like traditional securities, the case states, investors buy these tokens in the hope that their value will increase as the issuer does something that will in turn give the token value.

Moreover, the similarity of certain digital assets to traditional securities is enhanced by the fact that the tokens are offered to the public by way of an initial coin offering (ICO), which is modeled after the initial public offering (IPO) of a traditional security, the lawsuit adds.

Despite this, none of the 79 tokens at issue are registered with the United States Securities and Exchange Commission or state regulators, the complaint says. As a result, purchasers have no access to the disclosures that come with the issuance of traditional securities, and receive at most a so-called “whitepaper” that, while describing a token, does not satisfy federal and state prospectus requirements, according to the case. Further, whitepapers are often supplemented by ads and social media posts that promote a particular token, the suit notes.

The lawsuit argues that the Coinbase platforms—Coinbase and Coinbase Pro—are considered “exchanges” under federal law given they perform the functions of a traditional exchange by bringing together buy and sell orders and use established and nondiscretionary methods to set the prices at which the orders are executed.

The lawsuit looks to cover all persons and entities who transacted in any of the 79 tokens listed on this page on the Coinbase platform and/or the Coinbase Pro platform between October 8, 2019 and the present.

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