Coinbase (COIN.O) will be forced to face a lawsuit filed by customers who claim the largest U.S. cryptocurrency exchange illegally sold securities without registering as a broker-dealer, a federal judge ruled on Friday.
U.S. District Judge Paul Engelmayer in Manhattan dismissed Coinbase’s argument that it was not a “statutory seller” under federal securities law. The company had argued that it did not transfer ownership of 79 tokens traded by customers.
However, the judge cited accusations that “customers on Coinbase transact solely with Coinbase itself,” which led to the conclusion that Coinbase was, in fact, a seller. Judge Engelmayer also rejected the company’s attempt to dismiss claims based on the laws of California, Florida, and New Jersey, saying customers had made a sufficient case that Coinbase directly sold the tokens.
In response, Coinbase stated, “Coinbase does not list, offer, or sell securities on its exchange. We look forward to vindicating the remaining claims in the district court.”
Attorneys for the customers did not immediately respond to requests for comment.
This case had been previously dismissed by Engelmayer in February 2023, but in April, the 2nd U.S. Circuit Court of Appeals in Manhattan revived parts of the lawsuit. The recent decision allows those claims to continue. Customers are seeking unspecified damages.
In addition to this lawsuit, the U.S. Securities and Exchange Commission (SEC) is suing Coinbase, alleging the exchange allowed the trading of tokens that should have been registered as securities.
Last month, another federal judge in Manhattan paused that case, allowing Coinbase to ask the 2nd Circuit whether, based on a 1946 Supreme Court precedent, digital token trades should be considered investment contracts requiring securities regulation.
In a filing on January 17, Coinbase stated that the appeals court’s decision could “clear away the cloud that currently hangs over the cryptocurrency market.”