Federal Judge Forces Coinbase to Confront Broker-Dealer Allegations

Coinbase (NASDAQ: COIN) is facing mounting legal pressure over allegations that it illegally offered and sold digital tokens that qualify as securities. A federal judge in Manhattan recently ruled that Coinbase must answer claims from customers who say the company failed to register as a broker-dealer.

District Judge Paul Engelmayer determined that Coinbase could not escape liability by arguing it did not qualify as a “statutory seller” under federal securities laws. According to the judge’s findings, because customers transact directly with Coinbase, the company is effectively acting as the seller of these tokens.

Although parts of the initial lawsuit were dismissed in early 2023, the 2nd US Circuit Court of Appeals revived certain critical claims in April of that year.

In a statement, Coinbase reiterated that it “does not list, offer, or sell securities on its exchange” and that it anticipates defending its position in the district court. While the lawsuit has the potential to impose penalties if Coinbase is found in violation of securities laws, the company asserts that the tokens traded on its platform do not meet the legal definition of securities under long-standing precedent.

Simultaneously, the SEC has launched its own legal action against Coinbase, alleging the platform permitted trading in digital tokens that should have been registered as securities. In a separate proceeding, another federal judge in Manhattan granted Coinbase the right to swiftly appeal whether the Howey test should govern digital tokens.

Coinbase contends this appeal could offer critical clarity for the entire cryptocurrency industry, which faces ongoing uncertainty over how digital assets are regulated.

Information for this story was found via Reuters and the sources and the companies mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.