By
Bhushan Akolkar
May 3rd, 2024
Coinbase recently saw a dismissal of a class action suit brought against it by three aggrieved customers early last year.
Coinbase (NASDAQ: COIN) has obtained a dismissal of a class action suit filed last year. The United States Southern New York District Court dismissed claims based on the Securities and Exchange Act but did not address whether the 79 tokens in question were securities.
In his ruling, Judge Paul Engelmayer addressed the plaintiff’s previously established Howey claims, saying:
“Were this case to reach summary judgment, this contention would emerge as a central battleground.”
The Coinbase class action suit dismissal partly concludes the allegations against the exchange and its CEO Brian Armstrong for selling unregistered securities. The suit filed last March stated that Coinbase sold 79 listed tokens without proper registration. In addition, prosecutors at the time said the leading exchange failed to warn customers of the securities’ inherent risks.
The suit levied charges under the Securities Act of 1933 and Exchange Act of 1934. Furthermore, these allegations used the Howey test, which was instituted by the US Supreme Court in 1946, to identify the tokens.
Coinbase Class Action Dismissal
Although the plaintiff argued for each token individually, the judge assumed the tokens were securities for the purpose of his analysis. As a result, he did not consider claims based on Howey any further. Instead, the presiding judge said that Coinbase’s user agreement contradicts the plaintiffs’ claim that the exchange actually sold those tokens. Furthermore, the court dismissed the Securities Act claims because Coinbase did not solicit sales under a strict legal definition.
The judge also ruled that the Exchange Act claim alleged the presence of a contract involving a banned transaction. Thus, he dismissed it by pointing out that the claim applied only to the user agreement. In Judge Engelmayer’s opinion, this claim did not necessitate illegal acts. Throughout the analysis, the New York district court judge cited case law.
Greater Need for Crypto Regulations
When the class action suit was filed against Coinbase last year by three individuals who bought crypto through the exchange, legal observers commented. For instance, Philip Moustakis, counsel at Seward & Kissel, described the case as unsurprising. According to Moustakis, even the Securities and Exchange Commission (SEC) took a hard-boiled stance toward the crypto industry.
However, Moustakis also pointed out the meticulous one-by-one examination of the tokens as a need for greater regulatory clarity. As he put it:
“Unless and until the SEC provides further guidance and a path to compliance for token issuers, crypto lending products, exchanges, and other market participants, the question of whether any particular crypto asset or transaction is a security will be litigated one at a time.”
“While the tests to determine whether a token is a security […] are well established, the analysis depends on facts and circumstances, and different evaluators weigh certain factors more than others, so it can yield different outcomes depending on one’s point of view,” added Moustakis.
Last August, Coinbase also sustained a class action suit regarding protecting user wallets and account lockouts.