In a landmark decision, the U.S. Court of Appeals for the Second Circuit has ruled in favor of Coinbase, a prominent cryptocurrency exchange, amidst a legal battle that has garnered significant attention.
This ruling confirms that the sale of cryptocurrencies on Coinbase’s platform does not contravene the Securities Exchange Act, marking a considerable triumph for the company and the broader cryptocurrency sector.
This case revolved around a nationwide class of individuals who engaged in token trading on Coinbase from October 8, 2019, to March 11, 2022.
The core of the litigation questioned whether the cryptocurrencies traded on Coinbase qualified as securities under the law.
The plaintiffs brought forward claims under the Securities Act of 1933 and the Securities Exchange Act of 1934, along with alleging violations of securities laws in California, Florida, and New Jersey.
They argued that Coinbase had been involved in the sale of unregistered securities and breached multiple securities laws.
Contrarily, Coinbase maintained that the sales of crypto-assets on its platform did not fulfill the definition of a securities transaction, challenging the applicability of securities laws to these operations.
The Court of Appeals dissected various elements of the case, overturning certain lower court rulings while upholding others.
Specifically, it acknowledged the possibility of Coinbase’s liability under the Securities Act for the sale of unregistered securities but dismissed the claims under the Securities Exchange Act due to a lack of evidence for transaction-specific contracts essential for rescission under Section 29.
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The interpretation of Coinbase’s user agreements, which have changed over time, played a pivotal role in the court’s decision.
The variance in language across different versions of the agreements introduced complexities regarding title and privity issues, underscoring the importance of clarity on the applicable version of the user agreement.
From one perspective, the plaintiffs see this verdict as a positive development in ensuring cryptocurrency platforms comply with securities laws, thereby protecting investors in the rapidly evolving digital asset space.
On the other hand, Coinbase views the ruling as an affirmation of its stance that secondary sales of crypto are not securities transactions.
Coinbase’s Chief Legal Officer, Paul Grewal, took to the X social platform to express gratitude for the decision, highlighting that the Second Circuit has reiterated the absence of private liability for secondary digital asset trading on exchanges under federal securities law.
He emphasized the crucial role of contractual agreements in this context.
Moreover, Coinbase underlined the importance of regulatory clarity to nurture innovation in the cryptocurrency industry, indicating the significant implications of the Court of Appeals’ decision for the regulation of cryptocurrencies and digital assets.
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