Crypto Scandal: Coinbase Must Face Accusations It Operated Illegally, Court Rules

In a flip of the coin, an appeals court has ruled that Coinbase, the largest U.S. cryptocurrency exchange, must face allegations from customers that it illegally sold securities and failed to register as a broker-dealer, Reuters reported.

The lawsuit was previously tossed out by a lower court judge, who ruled that a 2021 user agreement overrode the claims being made by the marketplace users.

Court overturns previous ruling

Now, the 2nd U.S. Circuit Court of Appeals in Manhattan overturned the ruling, finding the 2021 user agreement, which Coinbase argued cleared it of liability, was not “conclusive” and had changed over time, making it insufficient to dismiss the claims. Coinbase customers said in the proposed class action that they had not accepted this version of the agreement, making it irrelevant to their case.

While some claims under the federal Securities Exchange Act were dismissed, the court's decision means the lawsuit is back in the hands of U.S. District Judge Paul Engelmayer, who originally tossed the case in 2023, in Manhattan.

Jordan Goldstein, who is representing the customers, supported the decision and said he would continue pursuing the case. However, Paul Grewal, Coinbase's chief legal officer, took a different stance  on social media saying he welcomed the dismissal of some claims and emphasized the importance of contracts in determining liability for secondary trading of digital assets. 

What the lawsuit alleges

The proposed class action lawsuit filed by the customers accuses Coinbase of illegally selling 79 digital assets. They say given Coinbase wasn’t registered with the Securities Exchange Commission, the sales amounted to illegal contracts, Bloomberg reports.

The consumers allege Coinbase promoted the sale of the tokens by providing users with descriptions and their purported value, and also participated in promotions with news updates about cryptocurrency price movements and links to web stories, violating the Securities and Exchange Act.

What is Coinbase?

Coinbase is a prominent cryptocurrency exchange that allows users to buy and sell various cryptocurrencies, including popular ones like Bitcoin and Ethereum. With around 120 different types of cryptocurrency, it serves as a gateway for new investors entering the cryptocurrency market, offering access to a range of digital assets.

Some of the most popular cryptocurrencies include:

• Ethereum
• Cardano
• Bitcoin
• Binance Coin
• Doge 
• Solana Tether

How does cryptocurrency work?

The world of cryptocurrency can seem like a large complicated web to dive into. At their core, cryptocurrencies are a digital, encrypted, and decentralized medium of exchange. Unlike the dollar system, there is no central authority that manages the value of cryptocurrency — instead users across the internet (and across the world) are in charge of that, Forbes reports.

While cryptocurrencies are generally invested in as assets, they can be used to make purchases. They are subject to faster and cheaper money transfers, and the currency won’t collapse if there is a single point of failure. However, there are many risks including their price volatility, high energy consumption for mining activities, and use in criminal activities, according to Investopedia. 

Regulatory challenges in the crypto industry

The lawsuit against Coinbase is part of a broader landscape of legal challenges and regulatory scrutiny facing the cryptocurrency industry. The SEC has been actively monitoring exchanges and platforms for compliance with securities laws, and has had Coinbase under its watchful eye.

In June 2023, the agency sued Coinbase alleging it had illegally operated as an exchange, broker-dealer, and clearing agency, and offered and sold unregistered securities, violating laws designed to protect consumers. The lawsuit is ongoing. 

Meanwhile, the industry has faced other challenges, including scandals, bankruptcies, and regulatory conflicts. High-profile figures like Changpeng Zhao of Binance and Sam Bankman-Fried of FTX have been embroiled in legal issues. There have also been a range of class action lawsuits related to various issues such as security, misleading information, and regulatory compliance. In the current lawsuit against Coinbase, customers are seeking damages.

The plaintiff and proposed class is represented by Spencer Sheehan of Sheehan & Associates P.C.

The Coinbase illegal operation proposed class action lawsuit is Oberlander et al v Coinbase Global Inc et al, Case No. 23-184 in the 2nd U.S. Circuit Court of Appeals.