Crypto exchange giant Coinbase is getting hit with a class-action lawsuit that alleges the company sells digital assets as unregistered securities.
According to recent court documents, the leading US-based crypto exchange platform is being sued by three individuals who claim that it is illegally selling virtual assets.
“During the period of October 8, 2019, and the present, Coinbase has used [their] platform to buy from and sell to customers 79 different digital assets at issue in that action.
But what Coinbase has not disclosed is that the tokens are in fact securities, and Coinbase is selling these securities despite the fact that there is no registration statement in effect for these securities and despite the fact that Coinbase has refused to register either as a securities exchange or as a broker-dealer.”
According to the Securities Act of 1933, all securities, or assets that can be traded between parties and in the open market, must be registered with the U.S. Securities and Exchange Commission (SEC).
The lawsuit gives a separate argument for why each crypto asset Coinbase offers counts as a security under the Howey Test and thus would be subject to regulation from the SEC.
The Howey Test is the standard methodology put in place by the Supreme Court to determine whether or not an asset counts as a security.
The litigation also alleges that trades conducted on Coinbase don’t take play on any blockchain and don’t actually transfer any assets between users.
“The trades conducted [on Coinbase] do not in fact happen on [any] blockchain and do not actually involve the transfer of any assets between users. Instead, it is Coinbase that faces both the buyer and the seller.
Thus, if Angela wishes to trade one Bitcoin for ten Ethereum on Coinbase, Coinbase will update its internal records to debit Angela’s account one Bitcoin and credit it ten Ethereum; no actual crypto-assets are moved on the blockchain.
Nor is there any sense in which Angela’s Bitcoin is transferred to anyone other than Coinbase.”
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