Lawyers for cryptocurrency-trading platform Coinbase Global Inc filed a motion this month to dismiss a class-action lawsuit that argued that 79 tokens listed on the firm’s platform are unregistered securities.
A group of Coinbase users are seeking reimbursement for trading fees and market losses and preventing the asset from continuing to trade on the platform.
Outside of enforcement actions, the Securities and Exchange Commission has not indicated which cryptocurrencies it considers securities. But federal statutes passed in the 1930s deputize ordinary investors to help the SEC do its job by giving buyers of unregistered securities the right to sue the seller for their money back.
The evaporation of nearly $1.5 trillion from cryptocurrency markets over the past six months could provide a new impetus for investors to test that power.
“The more money at stake, the greater the potential for litigation, and with the sharp drop in crypto values, the incentive for litigation has grown exponentially,” said Joseph Grundfest, a former SEC commissioner who teaches law at Stanford University.
There are ongoing lawsuits related to cryptocurrencies this year. According to a database maintained by Stanford University and Cornerstone Research, investors have so far filed eight class-action lawsuits related to cryptocurrencies in 2022, compared to 11 in 2021.
U.S. law imposes careful rules and cumbersome disclosure requirements on issuers and intermediaries who sell securities, a class of assets that includes stocks and bonds. They also create potentially crippling liabilities for anyone who circumvents the law.
The cryptocurrency platform has sought to ease the headache by arguing that the tokens they list in the US are commodities like gold, with no full-time federal regulators.
Industry lawyers say the cost of getting it wrong is potentially catastrophic for trading venues that allow US investors to buy and sell many digital tokens.
“If successful, the plaintiffs will effectively freeze the accounts of the innocent by this court” [Coinbase] Users who, of their choice, transact with each other in these tokens,” Coinbase lawyers wrote in the motion to dismiss the case. “Other digital asset trading platforms will likely be compelled to do so.”
Coinbase’s lawyers argue that its platform brings together buyers and sellers of cryptocurrencies, rather than transacting directly with users. For this reason, its lawyers argue, the firm will not be liable as a seller, even if the assets on its platform are deemed to be securities.
Lawyers and SEC officials say that since the cryptocurrency-trading platform is not monitored by regulators and there are clear transactions internally rather than on a public blockchain, there is little transparency in how trades are executed on Coinbase. . SEC Chairman Gary Gensler, without naming the companies or going into more detail, alleged that the platforms trade against their customers.
Coinbase attorneys also say that the cryptocurrencies in the lawsuit are not securities.
But the issuer of one token featured in the Coinbase lawsuit, Block. One, last year agreed to pay $27.5 million to settle an investor lawsuit alleging that its EOS token was an unregistered security offering. EOS is still listed on Coinbase.
Another cryptocurrency in the Coinbase lawsuit, XRP, is the focus of continuing SEC litigation and is no longer available to Coinbase users.
To determine whether an asset is a security, regulators and courts apply a four-part test developed in the 1946 Supreme Court orange trees decision. Known as the Howe test, it involves the investment of money in a common enterprise with the expectation of profit from the efforts of others.
Cryptocurrency advocates say that once the token’s underlying network is sufficiently decentralized, its value no longer depends on the efforts of an entrepreneur or manager, so it should not be considered a security. But the line is often vague and the facts ambiguous.
Mr Gensler has repeatedly stated that many of the assets traded on US crypto platforms are potential securities. He urged firms to register with the agency as regulated exchanges similar to the Nasdaq or the New York Stock Exchange.
“They know that most of what they have on their platform could be securities,” Gensler told reporters on May 18. “They must move toward being registered, or we’re going to be the cops on the beat and we’re going to bring enforcement action.”
In response to an email about litigation and liabilities resulting from listing potentially unregistered securities, a Coinbase spokesperson said, “This highlights the need for transparency, public-facing analysis, and clear guidance from the SEC.” The firm said it takes strict legal action when it analyzes a new cryptocurrency listed on its platform and believes in its conclusion that none of the assets it offers are securities.
“We want to engage constructively on this issue but believe the SEC needs to make its views public so that a meaningful debate can take place,” the spokesperson said. “Clarity is important.”
An SEC spokesperson declined to comment.
Issuers of registered securities, such as publicly traded companies, must file standardized forms with the SEC that disclose any information relevant to investors. This includes quarterly and annual earnings, key business operations and risks, and the identities of the company’s top executives, among other things. He can be held responsible for the major misstatements.
Information about cryptocurrency projects, by comparison, is usually disclosed in so-called white papers by authors who may or may not use pseudonyms. Documents lack any formal structure or standardization, often making them difficult to understand for unsophisticated readers.
“You have a lot of inexperienced investors who generally don’t understand the risks of investing in securities,” said James Serritella, plaintiff’s attorney in another lawsuit against the cryptocurrency platform. “You have token issuers with no restrictions on either… and so it just invites fraud.”
This story has been published without modification to the text from a wire agency feed