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Coinbase Hit With Class-Action Suit for Failure to Register as an Exchange

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What You Need to Know

  • Coinbase operates two digital asset trading platforms.
  • Plaintiffs are suing Coinbase for not registering its platforms as national securities exchanges.
  • Coinbase has denied that the digital assets it lists on the Coinbase Digital Asset Platforms are securities, the suit states.

Coinbase was hit with a class-action lawsuit Friday for not registering its platforms as national securities exchanges or as broker-dealers with the Securities and Exchange Commission.

The plaintiffs seek to recover payment for digital asset securities and related transaction fees, in excess of $5 million. The suit was filed in U.S. District Court for the Southern District of New York.

Coinbase, the U.S.’s biggest cryptocurrency exchange, operates two digital asset trading platforms: Coinbase and Coinbase Pro that each and together meet the definition of an “exchange” under federal securities laws, the suit states.

“Despite the fact that the Coinbase Digital Asset Platforms, as operated by Defendant Coinbase, meet the definition of an ‘exchange’ under federal securities laws, Coinbase has not registered the Coinbase Digital Asset Platforms as national securities exchanges, nor does Coinbase operate the Coinbase Digital Asset Platforms pursuant to an exemption from registration,” the suit states.

Coinbase’s failure to register is therefore a violation of Section 5 of the Exchange Act.

At all relevant times, the suit maintains, “Coinbase claimed to analyze whether a particular digital asset was a security in determining whether to list that digital asset for trading on the Coinbase Platforms. Coinbase has denied that the digital assets it lists on the Coinbase Digital Asset Platforms are securities and has denied that the Coinbase Digital Asset Platforms provide securities services to users of the Coinbase Digital Asset Platforms.”

Coinbase has to date refused to register the Coinbase Digital Asset Platforms as national securities exchanges or as broker-dealers with the SEC, the suit states.

“This is because Coinbase is well aware that if the digital assets it lists are securities, it would mean that the Coinbase Digital Asset Platforms would have to comply with the Exchange Acts requirements, which they have failed to do to date,” according to the suit.

Analysis of the facts and circumstances surrounding many of the digital assets listed for trading on the Coinbase Digital Asset Platforms “shows that many assets offered for trading by Coinbase are investment contracts … and are therefore, securities,” the suit explains.

Regulating Crypto Exchanges

Sen. Elizabeth Warren, D-Mass., has signaled that legislation may be needed to give the SEC the authority it needs to regulate cryptocurrency exchanges.

Coinbase disclosed in a blog post that the SEC issued a Wells notice, meaning it may pursue enforcement action, and opened a formal investigation, Bloomberg reported on Sept. 8.

The issue centers on Coinbase’s product called Lend, which the company has marketed as a high-yield alternative to traditional savings accounts that could earn an annual yield of 4%.

The product hasn’t been launched yet, but Coinbase encouraged customers in June to sign up for pre-enrollment.

The question is whether decentralized finance, or DeFi, lending pools qualify as securities.