Coinbase Effort to Dismiss SEC Suit Falls Short

A New York federal court has held that the SEC sufficiently pleaded that Coinbase—a well-known cryptocurrency exchange, broker, and clearing agency—operated as an unregistered intermediary of securities and engaged in the unregistered offer and sale of securities through its crypto staking program.  In a partial win for Coinbase (and possibly others offering wallet services), the court dismissed the SEC’s claim that Coinbase acted as an unregistered broker by offering a crypto wallet application to its customers.  The case is Sec. and Exch. Comm’n v. Coinbase, Inc., 23 Civ. 4738 (S.D.N.Y. Mar. 27, 2024).

This decision has important ramifications for all players in the crypto market, as it clears the way for the SEC to continue to act as the primary regulator of crypto in the absence of further regulatory direction from Congress and allows the SEC to continue aggressive enforcement in the crypto space.

Coinbase operates as one of the world’s largest crypto trading platforms that offers additional services that complement its crypto trading operations.  Coinbase “Prime” is a service that institutional customers can use to execute large volumes of crypto trades through both Coinbase and third-party trading platforms.  Coinbase “Wallet” is a self-custodial wallet that allows customers to store crypto assets on their own computers or mobile devices with the ability to connect to decentralized exchanges to trade these assets.  Coinbase’s staking program allows customers to earn financial rewards (usually in the form of cryptocurrency) for transferring custody of assets to Coinbase, who in turn takes a commission from the staking profits and returns the balance to the customer.

On June 6, 2023, the SEC brought a lawsuit against Coinbase under the Securities Act of 1933 and the Securities Exchange Act of 1934.  The SEC alleged that Coinbase violated the law by acting as an unregistered securities broker, an unregistered securities exchange, and an unregistered securities clearing agency.  The SEC named a dozen popular crypto assets (including Solana and Chiliz) and argued that these assets met the legal definition of a “security” (in SEC parlance, an “investment contract”).  Thus, the SEC alleged that Coinbase violated the law by working with these assets and not registering with the SEC.  Coinbase moved to dismiss the SEC’s complaint, contending primarily that none of the crypto assets named by the SEC met the definition of an investment contract and Coinbase therefore was not subject to federal securities laws.

The decision, authored by Judge Katherine Polk Failla in the Southern District of New York, first held that the SEC was not violating regulatory and administrative law by instituting its enforcement action against Coinbase.  The court then applied the well-known Howey test for investment contracts and held that the SEC plausibly alleged that at least some of the crypto asset transactions on Coinbase’s platform (including those on its Prime service) constituted investment contracts.  After finding that the SEC plausibly alleged that Coinbase facilitated transactions in securities, the Court declined to dismiss the majority of the SEC’s claims alleging that Coinbase violated the federal securities laws. Additionally, the Court held that the SEC adequately alleged that Coinbase’s crypto staking program was an investment contract subject to federal securities law.

Notably, the court rejected Coinbase’s argument that secondary market transactions–those that involve an asset purchaser buying crypto assets from someone other than the original issuer–were excluded from the definition of investment contracts.  Coinbase relied, among other cases, on the July 2023 decision in SEC v. Ripple by another judge in the Southern District of New York, which held that Ripple’s sales of XRP (a crypto token) on secondary platforms did not constitute securities transactions (SEC v. Ripple also held that sales of XRP to institutional investors did constitute securities transactions).

Without directly contradicting the Ripple decision, Judge Failla ruled that crypto transactions on the secondary market cannot be categorically excluded from constituting investment contracts.  The Howey test makes no such distinction and Judge Failla found little logic to the attempt to draw a distinction between investors who buy directly from the issuer and those who purchase on the secondary market in reliance on “promises and offers made by issuers to the investing public.”  In her opinion, Judge Failla cited favorably to the December 2023 decision SEC v. Terraform Labs, from yet another judge of the Southern District of New York, which rejected many of the same arguments Coinbase raised regarding transactions on the secondary market.

The court did, however, dismiss the SEC’s claim that Coinbase conducted unregistered securities brokerage activity through its “Wallet” application.  The court noted that the Wallet application did not undertake routing activities traditionally carried out by securities brokers, including directing how and when to execute trades.  Indeed, the SEC’s allegations conceded that Coinbase had no control over a user’s crypto assets via the “Wallet” application.  This was ultimately fatal to the SEC’s claim because the SEC failed to adequately allege that Coinbase was acting as a broker.

The Coinbase decision provides the SEC with a win in two areas.  First, the court held that the SEC’s aggressive crypto enforcement actions did not violate federal or regulatory law, paving the way for the SEC to continue acting as the primary U.S. crypto regulator.  Second, the decision held as a matter of law that the SEC adequately alleged that Coinbase’s crypto services dealt in investment contracts.  Finally, the balance of cases within the Southern District of New York has now tipped decidedly in favor of the conclusion that, when the elements of the Howey test are met, there is little distinction to be drawn between investors who buy directly from the issuer and those who purchase on the secondary market.  While the SEC may not necessarily prevail at trial, this opens the door for further crypto enforcement actions and provides a strong basis for such actions to proceed past the pleading stage into the expensive and time-consuming process of discovery and motion practice.

Webinar: U.S. Law Enforcement Targets Growing Global Crypto Market

Duane Morris and Khaitan & Co will present a Zoom webinar, U.S. Law Enforcement Targets Growing Global Crypto Markets: The Tiger in the Grass ‒ What Every Crypto Actor Must Know Now, on Thursday, January 18, 2024, from 4:30 p.m. to 5:30 p.m. IST. (Note: For those attendees located in the U.S., the time for this webinar is Thursday, January 18, 2024, from 6:00 a.m. to 7:00 a.m. Eastern.)


Continue reading “Webinar: U.S. Law Enforcement Targets Growing Global Crypto Market”

Webinar: U.S. Law Enforcement Targets Crypto in Asia: The Tiger in the Grass ‒ What Every Crypto Actor Must Know Now

Duane Morris will present U.S. Law Enforcement Targets Crypto in Asia: The Tiger in the Grass ‒ What Every Crypto Actor Must Know Now on Thursday, November 30, 2023, from 10:00 a.m. to 11:00 a.m. Singapore.


About the Program

Crypto entrepreneurs and their financers and advisers are facing unprecedented enforcement activity from the U.S. government, including the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ). The SEC, in particular, has taken an aggressive stance in applying U.S. securities law to internationally based cryptocurrencies, and international players in the crypto market are routinely being called to defend themselves in U.S.-based investigations and U.S. courts.

In this webinar, a Duane Morris team will discuss the basis for the SEC and DOJ’s assertion of jurisdiction over international actors so that crypto players can determine whether their actions may lead to the need to comply with U.S. securities laws. The panel will also discuss the various U.S. laws that could be triggered so that foreign crypto actors become more acquainted with U.S. laws and regulations. The focus of the webinar is to educate crypto players enough so that they understand the risks.


  • Mauro Wolfe
  • Ramiro Rodriguez


  • Vincent Nolan

Learn more about the event and Duane Morris’ Fintech Group.

Note: For those attendees located in the U.S., the time for this webinar is Wednesday, November 29, 2023, from 10:00 p.m. to 11:00 p.m. Eastern.

Osbourne v Persons Unknown & Ors [2023]: High Court Judgment Handed Down in Highly Anticipated Case

A highly anticipated judgment has been passed down from the High Court, allowing for service via Non-Fungible Token (NFT) on a defendant as the sole means of service. Osbourne v Persons Unknown & Ors [2023] EWHC 340 (KB) concerns Ms. Lavinia Osbourne, who sought to restrict the movement of two NFTs, which were misappropriated from her cryptoasset wallet in 2022. In the judgment, Mr Healy-Pratt (sitting as a Deputy High Court Judge) expanded on the comments made by Lavender J in his January 2023 judgment relating to the same case.

To read the full text of this post by Duane Morris’ Charlyn Cruz and Sam Laycock, please visit the Duane Morris London Blog.

Factors to Consider when Faced with a Ransomware Attack

In this digital age, the data held by an organisation can be one of its most important commodities. Threat actors (also known as malicious actors) recognise this and as such, cyberattacks have been on the rise. In particular, ransomware attacks have increased in frequency – studies have found that more than three-quarters of UK businesses were affected by ransomware in 2021. This is to be expected, not least because an organisation can still experience significant disruption, even where it is not the target of a ransomware incident (for example, it could be that an organisation further up or down the supply chain may have been affected).

So what should a company do when their data is being held captive? Should they submit to the demands of the threat actor and simply pay? Or should they refuse to back down, on moral grounds (amongst other things)?

To read the full text of this post by Duane Morris attorneys Chris Recker and Charlyn Cruz, please visit the Duane Morris London Blog.

Can Blockchain and NFTs Revolutionize the Fashion Industry?

Following the worldwide disruption in retail due to COVID-19, sales of luxury goods are expected to grow as much as 25% in 2022. Much of this growth has been driven by e-commerce, with online sales totalling 23% of all luxury sales in 2020. Meanwhile, consumer sustainability demands have driven growth in luxury resale or rental markets, now worth an estimated $36 billion, while brands have expanded their reach into the brave new digital territory of the metaverse – the overlapping digital spaces in which we increasingly work, play, and consume.

Yet luxury’s digital embrace has been hampered by a concomitant rise in counterfeit goods in the physical and digital worlds.  Is blockchain the solution?

To read the full text of this article co-authored by Duane Morris attorney Kelly Bonner, please visit the Multilaw website.

U.S. Federal Lawsuit by Mt. Gox Customers Cannot Proceed as a Class Action

On February 24, 2014, the Mt. Gox bitcoin exchange went offline following a series of hacks through which tens of thousands of bitcoin were stolen. Following Mt. Gox’s collapse, regulators, prosecutors, and civil plaintiffs pursued Mt. Gox and related individuals to seek to hold responsible parties to account. Among those actions was a purported class action filed in the United States District Court for the Northern District of Illinois, on behalf of a purported class of more than 30,000 Mt. Gox customers against, among others, Mt. Gox and Mark Karpeles (Mt. Gox’s principal). See Greene v. Karpeles, Case No. 14 Civ. 1437 (N.D. Ill.) (filed Feb. 27, 2014). The case has a lengthy history, but in its present incarnation it has one defendant—Karpeles—and a sole plaintiff—Greene—who sought to certify a class of Mt. Gox customers. On June 22, 2021, the Honorable Gary Feinerman denied that request. Click here for a copy of Judge Feinerman’s Memorandum Opinion and Order.

By way of background, in early 2012 Mt. Gox posted Terms of Use on its website. Mt. Gox customers were required to accept the Terms of Use as a condition of using the exchange. But that doesn’t mean that every customer read the Terms of Use when they accepted them, or any time thereafter for that matter. Plaintiff Greene contends he did, and that he relied on certain representations in the Terms of Use when he used the exchange. But to determine if every other member of the proposed class similarly read the Terms of Use would require making an individual inquiry of each of those purported class members.

And that gets to the heart of this decision. Class certification in federal court is governed by Rule 23(a) of the Federal Rules of Civil Procedure. Before a class may be certified, it must satisfy the four requirements of Rule 23(a): “(1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.” In addition, the proposed class must satisfy one of the categories in Rule 23(b); as applicable here, it must be “a case in which the common questions predominate and class treatment is superior.” Where the questions of law or fact common to class members do not predominate over any questions affecting only individual members, then the proposed class does not satisfy the predominance requirement.

In the Mt. Gox case, the underlying claim is one for common law fraud. “Greene’s theory of fraud is that the Mt. Gox Terms of Use falsely represented that Mt. Gox held all assets on its users’ behalf and that trades involved actual assets, that Karpales knew those representations were false and intended to deceive Mt. Gox users, and that the users kept assets on Mt. Gox in reliance on Karpeles’s misrepresentations.” (emphasis added). But in order to have relied on Karpeles’s misrepresentations, each member of the class must have read the Terms of Use, or at least have been aware of the relevant provisions of the Terms of Use, and that the relevant Terms influenced their actions. Absent a presumption of reliance applicable to the class—and no such presumption existed in this case—reliance is individualized, that is, the court would have to make a determination of reliance with respect to each member of the class individually. “Holding over thirty thousand mini-trials to determine how each class member understood and whether each class member relied upon a contract they accepted nearly a decade ago would present insurmountable difficulties.” Judge Feinerman concluded, as a result, that common issues do not predominate and, therefore, class certification was not appropriate.

Decisions granting or denying class certification often are fact specific and do not garner much attention beyond the case in which the decision is made. But the Mt. Gox case is worthy of note for at least two reasons. First, the decision is among a very small group of cases examining class certification in the crypto context. It is worthwhile to watch the development of the law in this nascent area. Second, and more practically, when a court grants certification in a class action, it is an important victory for the class because it often forces the defendants to come to the bargaining table and settle soon thereafter. Conversely, when defendants defeat class certification—which, absent a change on appeal or an amended pleading, means the case can move forward with only the named plaintiff—it is an important victory for the defendants because it drastically reduces the liability landscape the defendants face and often brings a fairly quick close to the litigation.

SEC, Targeting Promoters, Enters the BitConnect Fray

The SEC last week sued several alleged promoters connected with BitConnect, accusing the individuals of participating in or aiding and abetting the offering of unregistered securities in violation of Section 5 of the Securities Act of 1933 and Section 15(a) of the Securities Exchange Act of 1934, and doing so without being registered as broker-dealers, as required by the federal securities laws. See SEC v. Brown, et al., No. 21 Civ. 4791 (JGK) (S.D.N.Y. May 28, 2021). According to the SEC, between January 2017 and January 2018, BitConnect, directly and through the named defendant promoters, solicited investors to participate in its “lending program,” whereby investors invested bitcoin with BitConnect in exchange for interest payments derived from value generated by a trading bot focused on profiting from the volatility of Bitcoin. According to the complaint, BitConnect guaranteed a “high rate of return” (as high as 40% per month) with “no risk” from the “safe” investment. The SEC contends the promoters—including U.S.-based Trevon Brown (a.k.a. Trevon James), Craig Grant, Ryan Maasen, and Michael Noble (a.k.a. Michael Crypto)—used social media and other communications to plug the lending program in return for referral commissions—a percentage of each investment resulting from their individual efforts and the efforts of their referral network. The SEC alleges that successful promoters also received so-called “development funds” that they could use for themselves or pass on to investors in their network. According to the complaint, the promoter defendants named in the lawsuit earned referral commissions and development funds ranging from more than $475,000 to $1.3 million. Another defendant, who allegedly served as the liaison between Bitconnect and the promoters, earned more than $2.6 million. The SEC seeks injunctive relief, disgorgement plus interest, and civil penalties. According to the SEC, its investigation is ongoing.

BitConnect’s legal troubles began in early 2018 when various state regulators, including Massachusetts and Texas) opened investigations and proceedings on BitConnect. At the same time, numerous investors filed lawsuits in federal court in Florida against BitConnect and some of the same promoters sued by the SEC last week. Those civil cases, which were consolidated, fell victim to multiple successful motion to dismiss and currently are on appeal to the Court of Appeals for the Eleventh Circuit.

What can we infer from the timing of the SEC’s lawsuit? Perhaps not much. BitConnect has been condemned variously as a Ponzi scheme, a scam, a fraud, and evidence of the “common knowledge” that the Bitcoin market is being manipulated. BitConnect, then, would seem a likely candidate for the SEC’s attention. It may seem curious that the SEC’s complaint comes more than three years after state regulators and private litigants focused their efforts on BitConnect. That could simply be a function of the time required to conduct the investigation. In its press release contemporaneous with the filing of the lawsuit, the SEC thanked “the Cayman Islands Monetary Authority, the Hong Kong Securities and Futures Commission, the Monetary Authority of Singapore, the Ontario Securities Commission, the Romanian Financial Supervisory Authority, and the Thailand Securities and Exchange Commission.” That is a lot of helping hands. Or perhaps the SEC has other developments on its mind. There are several applications for Bitcoin exchange-traded funds (ETFs) currently pending before the SEC, and the SEC has previously denied similar applications, inter alia, because of concerns about manipulation in the market for Bitcoin. So perhaps the timing is not so curious. Then again, the conduct at issue in the SEC’s lawsuit occurred in 2017-2018, making any connection to the state of the current market for Bitcoin more tenuous. At the very least, one must keep in mind the SEC’s mission to protect investors and maintain fair, orderly, and efficient markets; the SEC’s case against BitConnect reaffirms that one cannot assume that conduct well in the past has flown below or escaped the SEC’s pursuit of its mission.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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