A federal district court recently dismissed with prejudice a putative class action against the cryptocurrency exchange Coinbase, where the plaintiffs sought to hold the exchange liable for the sale of unregistered securities on behalf a nationwide class.  The court held that Coinbase neither directly sold the accused tokens to plaintiffs nor actively solicited their sale, and thus plaintiffs’ federal claims must be dismissed.  This decision has important implications for digital asset exchanges, which have faced a significant increase in class actions alleging the exchanges are themselves liable for the sale of unregistered securities.

The plaintiffs in Underwood et al v. Coinbase, 1:21-cv-08353 D.I. 71, 2023 WL 1431965, sought to hold the cryptocurrency exchange liable for selling 79 crypto tokens that plaintiffs alleged were unregistered securities.  Under the Securities Act, a defendant violates section 5(a) and (c) if they sell unregistered securities via interstate commerce, and it is a strict liability offense.  For the purposes of the motion to dismiss, the Court assumed that the accused crypto tokens were in fact unregistered securities being traded on the Coinbase exchange.  The question instead was whether Coinbase qualified as a “statutory seller” under Pinter v. Dahl, 486 U.S. 622, 642, 647 (1988), which required plaintiffs to allege facts that (i) the defendant either passed title or other interest in the unregistered security to the buyer for value, or (ii) successfully solicited the purchase.  The Court found that Coinbase did not fit under either prong.

Under Pinter’s first prong, the amended complaint alleged that Coinbase places all assets in a centralized wallet and conducts trades between users without updating the blockchain ledger, and instead just credits or debits customer accounts, and therefore Coinbase—not the users making the token trades—was the true selling party transferring title.  However, the plaintiffs’ original complaint specifically alleged that users could directly transact with each other to exchange tokens via the Coinbase platform, and the Coinbase User Agreement contradicted the allegation that Coinbase possessed title to deposited tokens. 

Under Pinter’s second prong, the court noted that “the Supreme Court narrowly construed ‘solicitation’” and that “collateral” participation was not sufficient.  Even though Coinbase hosted, wrote blog posts about, and supported free “airdrops” of the accused tokens, the Court held that none of this exceeded the marketing efforts exempted under Pinter.  The ruling should aid cryptocurrencies defending against other class actions attempting to hold them liable for the sale of tokens alleged to qualify as securities.