INVESTORS SAID COINBASE IS SELLING SECURITIES WANT COMPENSATION FOR LOSSES
With no clear regulatory framework for the U.S. industry, cryptocurrencies are still in the gray when it comes to investing. Investors are increasingly asking the courts whether digital assets are considered as assets like gold or securities such as stocks and shares.
Earlier this month, a group of Coinbase users took the company to court to claim compensation for the loss of crypto assets that they said were collateral.
Coinbase [COIN] responded with a proposal to dismiss the class action, claiming that 79 of the tokens listed on its platform were unregistered securities. On May 26, the WSJ took a closer look at the hot topic of cryptocurrencies.
Crypto: Security or Assets?
Former Securities and Exchange Commission (SEC) commissioner Joseph Grundfest told the company that it was related to the investment and the recent decline:
"The greater the risk of money laundering, the greater the risk of litigation, and with the sharp decline in crypto prices, the incentive to sue has grown significantly."
Crypto-related cases are on the rise this year, with eight already filed compared to 11 by 2021. SEC Chairman Gary Gensler is convinced that cryptos are securities and wants to impose the same rules prohibiting trading when stock brokers face it.
Coinbase advocates say crypto trading is often a peer-to-peer encounter, and users (that the SEC says protect) will suffer.
"If successful, the plaintiffs will have to have this court successfully suspend the accounts of the [Coinbase] innocent users, by their choice, and trade in each of these tokens," he said.
The ongoing battle between Ripple and the SEC highlights the complexity of the issue. The regulator says XRP is a protection because the company has sold tokens to investors. However, Ripple strongly opposes the claim. Winning the SEC could be a disaster for the entire crypto industry in the United States.
SEC Seeks Full Control
Earlier this month, Gensler added, "Many crypto tokens involve a group of business people who collect money from the public in anticipation of a profit." On May 18, he again switched to crypto trading, saying:
"They have to move on to registration, or we will be a police officer, and we will bring enforcement measures."
Howey testing is used to determine whether an asset is collateral. Referring to the 1946 U.S. Supreme Court case to determine whether the employee is eligible as an investment contract. Under U.S. law, an investment contract exists if there is a “normal business investment and reasonable expectation of the profits to be made by the efforts of others.”
Coinbase seeks further clarification from financial regulators; spokesman told WSJ:
"We want to have a constructive dialogue on this issue but we believe the SEC needs to put its thinking in public for a meaningful debate. Clarity is important. ”
In the meantime, regulators continue to drag their feet together in terms of defining the asset class and issuing a productive framework. Hopefully, it will be the one that was not created to crush the emerging industry.