Coinbase Breathes Sigh of Relief as Judge Throws out Class-Action Lawsuit

A U.S. judge has dismissed a proposed class-action lawsuit against Coinbase, providing some relief after recent bad news for the exchange.

Former Coinbase customers filed the class-action lawsuit against the exchange in a New York City federal court in Oct. 2021. The aggrieved parties accused Coinbase of facilitating the sale of unregistered securities on its platform.

They believe its sale of 79 digital assets constituted illegal contracts, as the exchange is not registered with the Securities and Exchange Commission (SEC). 

Ultimately, U.S. District Judge Paul A. Engelmayer disagreed with the customers’ arguments. He approved Coinbase’s request to dismiss the suit.

Reasons for Dismissal

One argument central to allegations is that the company holds title to digital assets on the exchange. However, Engelmayer refuted this, declaring that the terms of Coinbase’s user agreement “flatly contradict” this assertion. Customers also claimed that as an “intermediary,” Coinbase was the “actual seller” of their digital assets, the judge said it had no direct role in the transactions. 

Engelmayer also rejected the lawsuit’s position that Coinbase had not actively solicited any investments. Former customers said the exchange promoted the sale of tokens through purported value propositions and “airdrops” of free tokens. However, the judge decided that these were marketing efforts rather than a form of active solicitation. 

Engelmayer also said he did not reach a conclusion whether the digital assets are actually securities. However, the judge said he presumed they were in order to fulfill Coinbase’s dismissal request. The judge said this debate would have been the “central battleground” if he had allowed the suit to proceed.

Bad News for Coinbase

The dismissal will come as a relief to the U.S. crypto exchange after it was dealt a pair of blows recently. Last month, the Netherlands’ central bank fined the company €3.6 million for failing to comply with the country’s anti-money laundering laws. And the New York State Department of Financial Services imposed a $50 million fine on the exchange for the same reason.

Shortly after, Coinbase lost a pair of Web3 infrastructure executives in Joe Lallouz and Aaron Henshaw. The two are co-founders of Web3 infrastructure firm Bison Trails, which Coinbase acquired in 2021. Coinbase Ventures had been an early investor in the startup in 2019, with Bison Trails contributing infrastructure to the exchange’s custody services.