Plaintiff in Coinbase lawsuit raises issues of account lockouts, crypto as a security

Published at: Aug. 23, 2022

One user has filed a class-action lawsuit against crypto exchange Coinbase on behalf of account and wallet holders “who have had their accounts breached and incurred losses arising from the unauthorized transfer of assets.”

In an Aug. 15 filing in U.S. district court for the Northern District of Georgia, plaintiff George Kattula requested a jury trial against Coinbase, claiming the crypto exchange did not employ practices aimed at keeping users’ accounts secure, and had “improperly and unreasonably” locked clients out of their accounts during periods of peak volatility in the crypto market. In addition, Kattula alleged that Coinbase should be registered as a broker or dealer in the United States as the platform handles the transfer of securities — in this case, cryptocurrencies.

“Coinbase does not disclose that the crypto assets on its platform are securities,” said the lawsuit. “Indeed, Coinbase boldly flouts federal and state laws by proclaiming it does not need a registration statement for those securities and by refusing to register as a securities exchange or as a broker-dealer.”

The filing added:

“Crypto assets resemble traditional securities because they represent an investment in a project that is to be undertaken with the funds raised through the sale of the crypto (whether it be a “token,” “stablecoin,” or cryptocurrency). Investors purchase crypto with the hope that the crypto’s value will appreciate as the issuer creates some use that gives the crypto value.”

Coinbase has gone offline many times during periods of extreme volatility in the crypto market, prompting some users to take legal action. In March 2022, a class-action lawsuit filed in the Southern District Court of New York also claimed the crypto exchange was operating as an unregistered securities exchange, listing 79 different cryptocurrencies as securities falling under the regulatory umbrella of the Securities and Exchange Commission.

Related: Robinhood to face class action lawsuit from meme stock debacle

SEC chair Gary Gensler has said many times that “most” offerings from token projects fall under the agency’s regulatory purview as securities and should be registered accordingly. In July, the SEC announced charges against a former Coinbase product manager, his brother, and associate related to insider trading, claiming at least 9 of the 25 cryptocurrencies the trio allegedly used were securities.

In an interview with Cointelegraph released on Tuesday, former director of the Consumer Financial Protection Bureau Kathy Kraninger said that regulatory clarity in the crypto space could come down to case law. The legal team of a former OpenSea employee also accused of insider trading alleged in an Aug. 19 filing that prosecutors only filed charges in an attempt to set a legal precedent that nonfungible tokens were securities.

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