Coinbase faces (another) class action, investors brace for Q2 carnage

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Coinbase (NASDAQ: COIN) has been hit with a class action lawsuit that accuses the struggling cryptocurrency exchange of misleading customers on a number of fronts, including about the safety of assets stored on the site.

On August 4, the firm of Bragar Eagel & Squire P.C. filed a class action suit in the U.S. District Court of New Jersey. The suit seeks to enlist Coinbase Global Inc customers who “purchased or otherwise acquired Coinbase securities between April 4, 2021 and July 26, 2022.” Customers have until October 3 to register as part of the class.

The filing notes that on May 10, 2022, Coinbase’s Q1 earnings report revealed for the first time that “in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.”

The lawsuit’s reference to ‘Coinbase securities’ follows a recent Bloomberg report that the U.S. Securities and Exchange Commission (SEC) was investigating Coinbase for failing to register certain digital assets as securities, while allowing customers to trade those assets without alerting them as to the possible ramifications of dealing in unregistered securities.

The lawsuit alleges that Coinbase “made materially false and misleading statements regarding the Company’s business, operations, and compliance policies” during the period in question. These actions rendered Coinbase vulnerable to “a heightened risk of regulatory and governmental scrutiny and enforcement action” that in turn jeopardized the safety of assets stored on the exchange by Coinbase customers.

This is hardly the only class action suit currently occupying Coinbase’s in-house legal team. In June, a class action was brought alleging that Coinbase didn’t (a) inform customers of the risks underpinning the since-collapsed TerraUSD stablecoin issued by Terraform Labs, or (b) disclose that Coinbase’s venture capital division was a backer of Terraform Labs. A different suit alleges that Coinbase was reckless in listing the GYEN stablecoin that soon lost its peg to the Japanese yen, resulting in steep losses for Coinbase customers.

In May, Dr. Craig Wright sued Coinbase and Kraken for ‘passing off’ the BTC token as the original Bitcoin described in the 2008 white paper. Coinbase is also a member of the Crypto Open Patent Alliance (COPA), which is suing Dr. Wright in a bid to discredit his claims to be the real world figure behind Satoshi Nakamoto, the pseudonymous author of the Bitcoin white paper.

Self-inflicted wounds

The SEC probe into Coinbase’s listing of unregistered securities followed a former Coinbase product manager being accused of insider trading based on advance knowledge of the tokens the exchange planned to list. While the ex-staffer has since pleaded not guilty, the SEC identified nine tokens involved in this affair as unregistered securities.

Outside of the self-involved corners of Coinbase’s C-suite, there’s a growing consensus that many of the function-free tokens that Coinbase has chosen to list in a bid to boost its trading revenue meet the regulatory definition of a security. This could have significant impact on Coinbase’s ability to show investors that it has a way out of its current fiscal predicament.

Last week saw not one but two damning Coinbase profiles in the New York Times and the Wall Street Journal. The Times spoke of the ‘humbling’ of Coinbase since last year’s Nasdaq listing as it pursued growth based on the inane belief that ‘number go up’ is an economic certainty. The Journal talked of Coinbase hiring staff “before even deciding on the new hires’ responsibilities” while adopting “unorthodox management practices that led to pushback among some of the staff.”

Last week, Cathie Wood’s Ark Investment Management dumped 1.4 million Coinbase shares, even though the shares were trading only slightly higher than their record low. On Monday, Wood told Bloomberg that she was moved to sell as “a little bit more uncertainty” arose due to the SEC’s interest in Coinbase’s unregistered securities.

Grim facts

Coinbase will report its Q2 earnings on today and investors are bracing for the likelihood that the company will show an even greater loss than the $430 million hit it took in Q1. The sizable layoffs and other cuts Coinbase has made in recent months won’t likely show any positive momentum for a while yet, although the share price recently rose to just under $100 after nearly sinking below $40 this spring.

Much of that upward surge came via a deal Coinbase announced with BlackRock, the world’s largest asset manager, last week. The deal will see Coinbase provide direct access to digital currency trading—starting with BTC—for institutional clients of Blackrock’s investment management platform Aladdin who are also Coinbase clients. (Quite the turnaround from 2018, when BlackRock CEO Larry Fink said his clients weren’t interested in digital assets and held the view that Bitcoin “just shows you how much demand for money laundering there is in the world.”)

While Coinbase is promoting the deal as further evidence that institutional investors are embracing digital assets, the fact that Fink sold $30.5 million worth of BlackRock shares—his largest such sale to date—the day after the Coinbase deal was announced doesn’t exactly scream confidence that investors are ready to take greater risks, particularly on an asset which has been struggling to live up to its ‘store of value’ marketing.

As Bloomberg’s Jared Dillian noted on Monday, BTC’s price actually fell following news of the Coinbase/BlackRock pairing. This “disappointing reaction” was the latest in a series of supposedly momentous announcements, including Fidelity Investments offering BTC in retirement plans, that ultimately proved incapable of restoring BTC’s former glories.

As Dillian summed it up: “I follow sentiment, and conditions are so poor that I would view the adoption of a regulatory framework as the only potential positive catalyst for crypto at this point. It may be the only way to attract money into the market, because if the BlackRock-Coinbase partnership can’t get anyone excited about Crypto, then nothing will.”

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple, Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.