A recent lawsuit against cryptocurrency exchange Coinbase has reignited the debate surrounding the classification of digital assets.
The lawsuit, filed by plaintiffs Gerardo Aceves, Thomas Fan, Edwin Martinez, Tiffany Smoot, Edouard Cordi and Brett Maggard in the United States District Court for the Northern District of California, alleges that eight cryptocurrencies listed on Coinbase – Algorand (ALGO), Stellar Lumens (XLM), Solana (SOL), Decentraland (MANA), Polygon (MATIC), Near Protocol (NEAR), Uniswap (UNI), and Tezos (XTZ) – constitute securities.
The lawsuit alleges that Coinbase’s digital asset sales knowingly violated state securities laws since the its inception.
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Interestingly, the SEC is in a legal battle with Ripple, and this new lawsuit could have implications for the XRP lawsuit.
BREAKING: New lawsuit against Coinbase claims that $ALGO, $XLM, $SOL, $MANA, $MATIC, $NEAR, $UNI, & $XTZ are SECURITIES.
Crazy ???? pic.twitter.com/G4z6Bze1M4
— MASON VERSLUIS (@MasonVersluis) May 4, 2024
The Potential Impact on Coinbase
The new lawsuit against Coinbase argues that the specific characteristics of the eight listed cryptocurrencies meet the Howey Test, a legal framework used by the courts to determine whether an investment contract qualifies as a security.
The lawsuit contends that these tokens meet all four prongs of the Howey Test, making them securities under the law. This classification would have significant implications for Coinbase. As a registered securities broker-dealer, Coinbase would be subject to stricter regulations, including mandatory registration with the SEC and compliance with disclosure requirements.
The lawsuit raises several critical questions regarding the future of cryptocurrency regulation in the United States.
Potential Impact on the XRP Lawsuit
In July 2023, the court determined that non-institutional sales of XRP do not qualify as securities offerings. This implied that secondary market trades of XRP on public exchanges were not subject to securities regulations.
Many believe the discourse of XRP’s security status is over, but this move by the SEC suggests that the regulator plans to appeal the ruling from July 2023.
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The question now is does the XRP case set a precedent? The outcome of the Ripple case may not be directly applicable to other cryptocurrencies. Each digital asset possesses unique characteristics, and the court’s final ruling in the Ripple case might differentiate between XRP and the cryptocurrencies listed in the current lawsuit.
If the SEC goes this route, it might not appeal the ruling. However, prominent attorney Jeremy Hogan has predicted that both parties will appeal after the final ruling.
Although he did not specify what parts of the lawsuit the SEC would appeal, the regulator’s actions suggest that the July ruling, which many XRP community members hold as a sign of XRP’s regulatory clarity, might be in jeopardy.
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