Coinbase must face customer lawsuit in New York

By Jonathan Stempel

NEW YORK (Reuters) – Coinbase must face a lawsuit by customers who accused the largest U.S. cryptocurrency exchange of illegally selling securities without registering as a broker-dealer, a federal judge ruled on Friday.

U.S. District Judge Paul Engelmayer in Manhattan rejected Coinbase’s argument it did not qualify as a “statutory seller” under federal securities law because it never passed title to 79 tokens that the customers traded.

The judge cited the accusation that “customers on Coinbase transact solely with Coinbase itself,” necessitating a conclusion that Coinbase was a seller.

Engelmayer also refused to dismiss claims under the laws of California, Florida and New Jersey, saying customers adequately alleged that Coinbase was a direct seller of the tokens.

“Coinbase does not list, offer, or sell securities on its exchange,” Coinbase said in a statement. “We look forward to vindicating the remaining claims in the district court.”

Lawyers for the customers did not immediately respond to requests for comment.

Engelmayer had dismissed the lawsuit in February 2023, but the 2nd U.S. Circuit Court of Appeals in Manhattan revived parts of it last April. Friday’s decision lets those parts proceed. Customers have sought unspecified damages.

The U.S. Securities and Exchange Commission is also suing Coinbase, claiming that the exchange illegally permitted trading of tokens that should have been registered as securities.

Last month, another Manhattan federal judge put that case on hold so Coinbase could immediately ask the 2nd Circuit whether, under a 1946 Supreme Court precedent, digital token trades were investment contracts that needed to be regulated as securities.

In a Jan. 17 court filing, Coinbase told the appeals court that its decision could “clear away the cloud that currently hangs over the cryptocurrency market.”

The case is Underwood et al v Coinbase Global Inc et al, U.S. District Court, Southern District of New York, No. 21-08353.

(Reporting by Jonathan Stempel in New York, Editing by Louise Heavens)