Coinbase, a prominent cryptocurrency exchange, has achieved a significant triumph in an ongoing legal battle. The U.S. Court of Appeals for the Second Circuit has ruled in favor of Coinbase, affirming that the secondary sales of cryptocurrencies on its platform do not violate the Securities Exchange Act.
This court decision impacts a nationwide group of individuals who traded tokens on Coinbase from October 8, 2019, to March 11, 2022. At the core of the disagreement was whether the cryptocurrencies traded on Coinbase met the requirements to be classified as securities.
The plaintiffs filed federal claims under Sections 5, 12(a)(1), and 15 of the Securities Act of 1933, as well as Sections 5, 15(a)(1), 20(a), and 29(b) of the Securities Exchange Act of 1934. They also presented state law claims related to securities legislation in California, Florida, and New Jersey, representing a nationwide class of individuals.
The plaintiffs argued that Coinbase’s actions constituted the offering and selling of unregistered securities. Additionally, they accused Coinbase of violating various provisions of securities laws.
However, Coinbase argued that secondary sales of crypto assets did not meet the criteria for securities transactions, questioning the relevance of securities regulations. The Court of Appeals thoroughly examined various aspects and ultimately overturned some of the lower court’s decisions while affirming others.
The court determined that Coinbase could potentially be held liable under Section 12(a)(1) of the Securities Act for vending unregistered securities. However, it dismissed the plaintiffs’ claims under the Securities Exchange Act, citing insufficient evidence of transaction-specific contracts necessary for rescission under Section 29.
The court’s decision heavily relied on the interpretation of Coinbase’s user agreements, which had evolved over time. Inconsistencies in language across different versions complicated matters of title and privity that were crucial to the case. The importance of clarity regarding the applicable user agreement version was emphasized, as discrepancies hindered a definitive resolution.
The plaintiffs perceive the ruling as a step forward in holding cryptocurrency platforms accountable under securities laws, advocating for investor protection in the ever-changing crypto landscape. On the other hand, Coinbase asserts that the decision reinforces its stance that secondary crypto sales are not securities transactions.
Furthermore, Coinbase emphasized the need for regulatory clarity to foster innovation within the industry. The Court of Appeals’ verdict has significant implications for the oversight of cryptocurrencies and digital assets.
In addition, Coinbase’s Chief Legal Officer, Paul Grewal, expressed gratitude on a social platform, emphasizing that the Second Circuit reaffirmed the absence of private liability for secondary trading of digital assets on exchanges like Coinbase under federal securities law, highlighting the importance of contracts.
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