Largest U.S. cryptocurrency exchange faces legal challenge over securities sales

A U.S. federal judge ruled Friday that Coinbase, the largest U.S. cryptocurrency exchange, must face a lawsuit from customers accusing it of illegally selling securities without registering as a broker-dealer.

U.S. District Judge Paul Engelmayer in Manhattan rejected Coinbase’s argument that it did not qualify as a “statutory seller” under federal securities law.

The judge cited allegations that Coinbase transacts directly with customers, making it a seller under the law. He also refused to dismiss claims under California, Florida, and New Jersey laws, saying customers sufficiently alleged Coinbase was a direct seller of tokens.

Coinbase maintained that it does not list or sell securities and said it would defend its position in court.

The lawsuit was initially dismissed in February 2023, but the 2nd U.S. Circuit Court of Appeals revived parts of it in April 2024. Engelmayer’s ruling allows those claims to proceed, with customers seeking unspecified damages.

Separately, the U.S. Securities and Exchange Commission is also suing Coinbase for allegedly enabling the trade of unregistered securities. Another Manhattan federal judge recently paused that case to allow Coinbase to appeal a key legal question about whether digital token trades qualify as investment contracts under a 1946 Supreme Court precedent.

In a Jan. 17 filing, Coinbase argued that the appeal could help clarify the regulatory uncertainty in the cryptocurrency market.