Coinbase Win, Industry Victory: Court Declares Crypto Not Securities On Secondary Markets

April 8, 2024

A U.S. court in a pivotal verdict last Friday handed down a decision significantly favoring Coinbase and the cryptocurrency sector at large.

The U.S. Court of Appeals for the Second Circuit declared that cryptocurrencies are not considered securities in secondary market trades, a determination that not only vindicates Coinbase’s operations but may also reshape the regulatory framework for digital assets in the U.S.

Legal Battle Highlights

The case saw plaintiffs Louis Oberlander, Christopher Underwood, and Henry Rodriguez accuse Coinbase of breaching both federal and state securities laws through its cryptocurrency trading activities. Their allegations, spanning a class action suit, targeted the trading of specific tokens on Coinbase between October 8, 2019, and March 11, 2022.

The plaintiffs lodged federal claims pursuant to Sections 5, 12(a)(1), and 15 of the Securities Act of 1933, in addition to Sections 5, 15(a)(1), 20(a), and 29(b) of the Securities Exchange Act of 1934. They also presented claims under the securities statutes of California, Florida, and New Jersey, representing a class action on behalf of individuals nationwide. 

Court’s Analysis and Conclusion

A critical point of the court’s analysis was the application of Section 12(a)(1) of the Securities Act, focusing on the sale of unregistered securities. While the court recognized potential liability under this section, it dismissed claims under the Securities Exchange Act due to insufficient evidence of the required transaction-specific contracts for rescission under Section 29.

The examination of Coinbase’s user agreements, which have evolved over time, presented challenges in establishing the specifics of title and privity, essential components of the plaintiffs’ case. The court emphasized the need to pinpoint which user agreement version was applicable, acknowledging that discrepancies among the versions posed significant hurdles to a definitive ruling.

Coinbase’s Response and Industry Implications

Following the ruling, Paul Grewal, Coinbase’s Chief Legal Officer, lauded the clarity brought by the Second Circuit on federal securities law, emphasizing the importance of contracts in the context of secondary trading of digital assets on platforms like Coinbase. This landmark decision is anticipated to bring much-needed regulatory clarity, potentially boosting confidence among institutional and retail investors in the crypto market.

Moreover, the ruling could serve as a precedent for other regulatory bodies and jurisdictions, possibly ushering in a more unified global regulatory stance on cryptocurrencies. With the SEC’s approach to crypto assets currently under intense scrutiny, this verdict offers a glimmer of regulatory certainty for exchanges and traders navigating the complex landscape of digital asset laws.

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