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Three Coinbase users have proposed a class action lawsuit against Coinbase accusing the company of offering unregistered securities in connection with 79 assets listed by the exchange.

The suit is brought on behalf of all Coinbase users and complains that the cryptocurrency exchange has been selling securities that are unregistered with the U.S. Securities and Exchange Commission (SEC), amounting to 15 violations of securities laws, including the requirement for those selling securities to register as an exchange. Coinbase CEO Brian Armstrong is also named as a defendant in the action, which accuses the CEO of knowing “the existence of the facts that give rise to the liability here because he knew that Coinbase was not registered as a securities exchange or as a broker-dealer and that it sold the Tokens, which were unregistered securities.”

The list of 79 alleged securities includes DOGE, LRC and XRP. The suit uses a number of criteria to distinguish the assets including in the suit from those which are not, and addresses each of the 79 listed assets individually. For example, most of the assets complained of in the suit are ones with little or no utility and the trading of which is focused on investment profit, an argument which speaks directly to the limbs of the Howey test for securities. Similarly, the suit argues that any token which was issued via ICO to be a security, a line the SEC has previously argued with success in its action against Telegram.

The plaintiffs seek damages and orders preventing Coinbase from continuing its ‘illegal practices.’

The lawsuit is part of an increase in scrutiny over rogue exchanges across the board, from regulators beginning enforcement to private citizens taking action. SEC Chair Gary Gensler sent out a not-so-subtle warning to Coinbase last year, urging the exchange to register themselves with the SEC and remarking that Coinbase “have dozens of tokens that may be securities.”

Intentional or not, this lawsuit seems a natural consequence of Gensler’s view and the increase in action taken by regulators to ensure that the digital asset industry is compliant.

Already facing a multitude of lawsuits over alleged market manipulation and insider trading, Coinbase’s woes seem destined to increase as the year progresses. Dr. Wright promised to launch “the biggest legal case in human history” against Coinbase later this year, having already instructed his lawyers to send out letters to Coinbase and other exchanges warning them over their use of the Bitcoin name to promote unrelated products. Dr. Wright has been banging that drum for some time—at the start of 2021, he wrote a blog post in which he made a prescient prediction about what is in store for Coinbase:

“I am more than happy to wait, to see the executives of Coinbase weasel and lie their way into telling everybody that they had no idea and that they don’t believe it. When they do, I’ll be there, ready to provide evidence to the contrary. When the executives of Coinbase attempt to give evidence showing that they had no idea that XRP was a controlled security, I will happily demonstrate their perjury and show how they intentionally overlooked the issue, amongst many others.”

With this latest class action suit, it seems that Coinbase will be attempting to argue exactly that.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—a from BitMEX to BinanceBitcoin.comBlockstreamShapeShiftCoinbaseRipple,
EthereumFTX 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.

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