We are experiencing a period characterised by two phenomena, within the world of cryptocurrencies. On the one hand, we are witnessing a true renaissance of investor confidence in them, mainly due to Bitcoin's recent significant appreciation. On the other, we cannot help but take note of the fact that there are continuous criminal prosecutions involving illegal conduct by the major players in the industry.
A few days ago, we delved into the trial against Changpeng Zhao, former CEO of Binance. Today, we turn our attention to a class-action lawsuit, signed by some customers of the well-known exchange, Coinbase Global. The users have taken two subsidiaries to court: Coinbase, Inc. and Coinbase Asset Management, LLC.
Error of Form or Intention to Fraud?
The target of the action is Brian Armstrong, CEO of Coinbase, who was sued on 5 May. The grounds for the lawsuit are related to the fact that all listed digital assets would be securities: Solana (SOL) to Polygon (MATIC); Near Protocol (NEAR) to Decentraland (MANA); Algorand (ALGO) to Uniswap (UNI) and Tezos (XTZ) to Stellar (XLM).
Because they are securities, the plaintiffs argue, these products with well-defined boundaries should comply with the law on investment contracts, which are clearly and firmly regulated in the US. According to the petitioners in the class action, this is not an oversight, but a clear intention to circumvent the law.
What Are Securities?
In the financial lexicon, the word security (and its plural, securities) denoteswhat, in Italian, we might call a security. These are tradable financial assets, which may comprise two families of products. The first is the one comprising the massive securities, the second concerns the derivative instruments. Securities, as is well known, can in turn be subdivided into shares, i.e. equity securities, and bonds, i.e. debt securities.
The defining characteristics of securities are as follows:
- they are fungible assets for which the value assigned prevails over the individual object. Two securities referring to the same product are identical and show no difference;
- the amount of the individual security is identical to that of the others issued together with it (we speak of identity of nominal value) and each issue consists of several securities made available to investors;
- although there are numerous types and sub-types of the same securities, each security of the same type, sub-type and issued at the same time assigns to its holder the same rights;
In Search of a Rescission
The plaintiffs are Gerardo Aceves, Thomas Fan, Edwin Martinez, Tiffany Smoot, Edouard Cordi and Brett Maggard, from Florida and California. The 6 have demandedanimmediate and complete termination of their contract with Coinbase and are seeking damages and an injunction against the financial actor for making them complicit in defrauding the federal state. In their view, it is the initial contract itself that betrays the exchange.
In fact, it clearly states on it how Coinbase calls itself a securities broker. For this reason, the service intentionally, repeatedly and recognised violates financial laws. The indictment, compiled by the U.S. Attorney's Office for the District of Northern California, based in San Francisco, also reads:
"This entire business model rests on a dream and a lie. The lie is the assertion that Coinbase does not sell securities and the dream is that, being aware of the possibility of getting caught, it is better to ask for forgiveness than permission."
In short, the allegations are quite heavy. Especially in the context of Coinbase, a service that very often finds itself involved in legal skirmishes with the SEC, the Securities and Exchange Commission. The exchange's counterargument remains the same: secondary sales of cryptocurrency assets do not constitute security.
The Coinbase Defence
In response to the lawsuit, Coinbase has settled, as we would say in Italy. In essence, the exchange signed an interlocutory appeal immediately after the judge gave the go-ahead for the proceedings, confirming the allegations made by the plaintiffs.
On the other hand, Coinbase appears to be in great shape, having put on record lavish earnings during the first quarter of 2024. The service's transactional revenues have tripled since its opening months, and customer transactions between January and April brought in $935 million, almost double the same value at the end of 2023. At a stage like this, it makes sense to quickly close any injunctions and focus on maximising revenue.
On Spaziocrypto, we will follow the development of this and the other legal events that are characterising this precise moment in cryptocurrency history.
