U.S. District Court of New York Dismisses Class Action Lawsuit Against Crypto Exchange Coinbase

News | February 13, 2023 By:

On Wednesday, February 1, 2023, the United States District Court of the Southern District of New York dismissed all the claims in the Amended Complaint against Coinbase Global Inc., Coinbase, Inc, and Brian Armstrong involving violations of the federal securities laws.

Coinbase Inc. operates two online Digital Trading platforms on which users can transact in the crypto economy. The said crypto-asset ecosystem depends on digital exchanges called “Crypto Exchanges”. This exchange emerged to enable smoother and faster trades between investors such as stocks and commodities exchanges emerge to make easy trading of securities possible.

In the Amended Complaint, the plaintiff alleges that among the assets that the defendants enable customers to buy and sell on these platforms are ones qualifying as securities. It alleges that these involve 79 digital assets known as “tokens”. The plaintiffs allege Coinbase’s practice of transacting in these securities with plaintiffs and other users. The problem is Coinbase is not registered with U.S. Securities and Exchange Commission (SEC) as an exchange or broker-dealer.

The filing states:

“The AC’s central premise is that Coinbase lists and sells securities but is not registered as a securities exchange or as a broker-dealer. Plaintiffs purchased and sold the Tokens on the Coinbase platforms during the Class Period, id. TN 1, 918-19, during which neither Coinbase Platform was registered with the SEC as a securities exchange, id 64; see 15 U.S.C. § 78c (registration requirements of “exchange” under Exchange Act), or broker-dealer, AC 1 64;, see 15 U.S.C. $ 78o(a)(1) (registration requirements for “brokers” and “dealers” under Exchange Act), nor “subject to exemptions from such registrations,” AC 15. “Because Coinbase brings together buy and sell orders for the Tokens[] and the Tokens are securities,” id., the AC alleges, Coinbase “stands between the buyer and seller in each trade on its platform, meaning that is the actual seller of the unregistered securities that transact each day on its platform,” id 16.”

The plaintiffs brought the action as a putative class action under the Federal Rules of Civil Procedure. The Plaintiffs seek certification of a nationwide class defined as “defined as “all persons or entities who transacted in the Tokens on the Coinbase Platform and/or the Coinbase Pro Platform during the Class Period.”

The filing continues:

“Plaintiffs also seek certification of three subclasses: (1) “all persons or entities who transacted in the Tokens on a Coinbase platform during the Class Period while in the State of California”; (2) “all persons or entities who transacted in the Tokens on a Coinbase platform during the Class Period while in the State of Florida”; and (3) “all persons or entities who transacted in the Tokens on a Coinbase platform during the Class Period while in the State of New Jersey.”

The court stated that the Amended complaints repudiate contrary allegations in the original complaint of the plaintiffs, in an apparent attempt to avoid dismissal.

The filing further states:

“The Complaint’s factual allegations directly contradict the AC’s claim that privity existed only between Coinbase and users, and not between users for the purposes of any individual transaction. It alleged that “[o]nce money or digital assets had been sent to the Coinbase Platform and credited to the wallet of Coinbase Platform user, a Coinbase Platform user can enter into trade agreements with other Coinbase Platform users for purchases and sales of digital assets.” Compl. 27 (emphasis added); see also id. 32 (same allegation for the Coinbase Pro platform). This allegation is flatly opposed to the Amended Complaint’s allegation that “Tt]he buyer and seller are not in privity with one another,” AC133, and that “[eJustomers on Coinbase transact solely with Coinbase itself” AC 936 (emphasis added).”A

According to the court, it cannot credit the AC’s allegations that privity was solely between the defendant and the plaintiffs for each of the transactions nor can it credit the AC’s allegations to the effect that the defendants held title to the assets that were subjects of these transactions. Moreover, as to the plaintiff’s federal law claims, the court stated that granting leaves to amend would be futile. The plaintiffs already had an opportunity to amend their complaint, and by doing so, they contradicted their initial complaint. With all these facts and allegations in consideration, the court decided to dismiss the plaintiff’s federal claims with prejudice.

The Disposition states:

“For the reasons above, the Court dismisses all claims in the AC. The federal claims are dismissed with prejudice. The state-law claims are dismissed without prejudice.”

A copy of the filing can be found here.