Class action alleges Coinbase acted unlawfully and fraudulently in listing XRP

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It has begun—a Coinbase (NASDAQ: COIN) user has initiated a class action suit against the cryptocurrency exchange, seeking recovery for customers who paid commissions for XRP trading. It claims Coinbase’s actions in making XRP available for trading violated California’s unfair competition laws, and that Coinbase was aware XRP constituted an unregistered security, rather than a commodity digital asset.

Coinbase’s actions were both unlawful and fraudulent, it adds.

Suit follows expected SEC action against Ripple, XRP

The class action follows the U.S. Securities and Exchange Commission’s (SEC) advice that it plans to bring its own action against XRP creators Ripple Labs, Inc. and two of its senior executives. In response, exchanges such as Coinbase and OKCoin have announced they will suspend XRP trading on their platforms in January while the matter is being settled.

Both the SEC action and the private suit should serve as a warning to digital asset exchanges that there are consequences for improperly listing digital assets for customers to trade. It is known that some in the Bitcoin BSV community are seeking to prove in court that only BSV is Bitcoin, and others (such as BTC) is an imposter and its promoters are engaging in illegal activity by claiming the “Bitcoin” name. Should this eventuate, it is highly likely to have flow-on effects similar to those Ripple Labs and XRP-trading exchanges are beginning to see.

The new Coinbase suit was filed this week for plaintiff Thomas Sandoval of Missouri (and others) in the U.S. District Court for the Northern District of California. It alleges that, based on Coinbase’s “technological integration into XRP’s nodes” and statements made by Ripple executives, the exchange would have known XRP was a security and not a commodity.

Coinbase is “a commodities broker for cryptocurrencies,” it reads, and is not licensed to sell securities. As for XRP, its value (and investors’ potential profits) was “entirely linked to the success or failure of Ripple Labs Inc. and the managerial actions of its executives.”

Why are people saying XRP is a security and not a commodity?

Allegations that XRP is an unregistered security and not a commodity digital asset have been around for years. However, a listing on a major digital asset trading platform can be seen as an endorsement of its legitimacy. This matters whether trading customers were aware of the allegations or not.

The suit continues that XRP is a security because Ripple “has sole control over the purported cryptocurrency’s nodes and is therefore a common enterprise” under U.S. federal securities laws. Furthermore, Ripple’s existence as a corporation depended on the sale of XRP tokens to the public, and it used income from this sale to fund its operations.

It describes a node as a computer server that stores a ledger of all an asset’s transactions, and processes transactions. Ripple/XRP therefore represents something different to other (non-security) cryptocurrencies which use “decentralized nodes” not controlled by any one company. This makes Ripple/XRP a “common enterprise” with a single point of failure, a circumstance that does not exist with other digital assets like Bitcoin.

As well as seeking recovery for any commissions paid to Coinbase for XRP sales/trades, plaintiffs are also asking for compensatory damages and legal costs. They are also demanding a trial by jury.

As Dr. Craig Wright has said in the past, the law may move slowly on matters concerning blockchain and digital assets, but it will catch up. Ripple and XRP have been around for over seven years—and has been a prominent, high-trading-volume and top-five listed asset for most of that time. By bringing its action against Ripple, the SEC demonstrates it is interested in more than just obscure ICO token scams, and that no name is too big to escape regulatory scrutiny. The coming years are set to be definitive for the digital asset industry in many ways, and compliance with the law is set to be one of the most significant new changes.

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