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Coinbase Lawsuit Unveils Regulatory Dilemma Amidst Record Profits

Published May 6, 2024 4:03 PM
Eddie Mitchell
Published May 6, 2024 4:03 PM
Key Takeaways
  • Six Coinbase investors are alleging that Coinbase has misled users and illegally sold unregistered securities since its inception.
  • Coinbase has recorded a strong Q1 2024 earning $1.6bn in net revenue and $1.2 billion in net income.
  • Revenue from the 8 spot Bitcoin ETF products Coinbase provides custodial services for are major drivers of this success.

Just as it posts a record-breaking Q1 2024 earnings report, Coinbase has received a fresh lawsuit from investors who allege it has used deceptive practices and violated U.S. securities laws, similar to those placed against the exchange by the Securities and Exchange Commission (SEC).

Curiously, Coinbase remains the custodian of the largest spot Bitcoin (BTC) exchange-traded funds (ETFs) in the U.S. as approved by the SEC, despite also being sued by the securities watchdog. Is the future of crypto in the U.S. always going to be this confusing?

Another Coinbase Lawsuit

A class action lawsuit by six complainants accused Coinbase, its subsidiaries, and CEO Brian Armstrong of selling unregistered securities on its platform.

As per the court filing , the “unregistered securities” in question are Solana (SOL) Uniswap (UNI), Stellar (XLM), Decentraland (MANA), Algorand (ALGO), Polygon (MATIC), Tezos (XTZ), and Near Protocol (NEAR).

The suit alleges that – since its inception – Coinbase’s sale of said digital assets has violated state securities laws. In addition, they argue that Coinbase acknowledges its role as a “securities broker” in its under agreement, which they see as an admission of guilt.

At present, Coinbase’s user agreement  says it “does not offer securities services” in the U.S. but is still a “securities intermediary” under California regulations. This is because digital assets offered on the platform count as “financial assets” under these regulations, and therefore a user’s wallet is defined as a “securities account.”

Speaking with CCN, a Coinbase spokesperson stated:

“The claims in this litigation are legally baseless. We have full faith in the judicial process and look forward to addressing them in full at the appropriate time.”

Plaintiffs also allege that Coinbase “knowingly and willfully” violated California securities laws by not registering as a broker-dealer, or registering the securities it offers. The lawsuit calls for a full rescission of all digital asset transactions on Coinbase, as well as statutory damages and injunctive relief.

Coinbase Profits

The lawsuit landed just as the exchange posted its Q1 2024 earnings , marking its second quarterly profit in a row. As per the earnings call, in Q1 2024 Coinbase earned $1.6 billion in total revenue and $1.2 billion in net income, which surpasses its entire 2023 earnings.

 

Consumer transaction revenue and overall crypto market performance have significantly boosted these figures. However, its role as custodian for 8 out of the eleven spot BTC ETFs has also contributed to this robust earnings report.

Coinbase is providing custody services to the largest spot BTC ETF providers in the U.S., which includes the Grayscale Bitcoin Trust (GBTC), Blackrock’s iShares Bitcoin Trust (IBIT), the Ark/21 Shares Bitcoin Trust (ARKB), and five others, all of which have transacted billions with institutional/qualified investors.

During the earnings call, Coinbase COO Emilie Choi elaborated on the “direct impacts” of these ETFs , stating:

“We saw native unit inflows as the custodian for eight of eleven issuers. This supported growth in our assets under custody of 69% quarter-over-quarter to $171 billion as well as growth in our custodial fee revenue of 64% quarter-over-quarter to $32 million.”

This raises an interesting question. How can Coinbase be an entity that illegally sells unregistered securities and therefore, the target of SECs enforcement, but also be the majority custodian for spot BTC ETFs, which were approved by the very same SEC?

Coinbase in the Grey Zone

Seemingly, Coinbase’s very existence is a catch-22. On one hand, it provides a highly sought-after and newly regulated investment product for qualified and institutional investors, all approved by the SEC.

On the other hand,  lawsuits from the SEC dating back to June 2023 , and now others, deem its operations as a cryptocurrency exchange and the cryptos it offers, as illegal. This places both the SEC and Coinbase in a very peculiar position.

Evidently, the ongoing battle does not exclude Coinbase from providing custodial services, or a market surveillance function. But speculatively, should the SEC emerge victorious over Coinbase, its role as custodian may become contentious and potentially called into question.

U.S. Cryptocurrency Regulations

There is a sense of disarray within the U.S. crypto industry as it struggles to establish clear, and fair, crypto regulations.

One such seminal case is the Ripple (XRP) Vs. SEC case. For the past four years, Ripple, CEO Brad Garlinghouse, and its co-founder Chris Larsen have been disputing the SEC’s claims that it sold $1.3bn of XRP as an unregistered security.

The SEC also recently launched a lawsuit against Uniswap, which could pose even greater existential questions to the decentralized finance (DeFi) space. The reason these cases are important is that their outcome may determine which crypto tokens are securities, and at what point of their creation/sale they become securities.

With Ripple now pushing to have a spot XRP ETF created and a lawsuit against the SEC coming from Consensys over Ethereum and the MetaMask wallet, some of the largest players in crypto appear to be fighting for the future of cryptocurrencies.

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