Coinbase Inc. knew cryptocurrency XRP was a security rather than a commodity and “illegally” sold Ripple Labs Inc.’s tokens anyway, a customer argues in a proposed class-action lawsuit over the commissions the crypto exchange collected.
Coinbase said this week it will stop selling XRP to the public after the U.S. Securities and Exchange Commission sued Ripple, alleging it misled investors by selling more than $1 billion of the virtual tokens for the world’s third-largest cryptocurrency without registering with the agency. Other exchanges are also suspending XRP sales to U.S. customers.
The lawsuit comes about two weeks after Coinbase, the biggest cryptocurrency exchange in the U.S., filed to go public. It’s expected to be the U.S.’s first crypto-related initial public offering, a watershed moment for the industry in gaining mainstream recognition. Meanwhile, Bitcoin is trading at all-time highs, having almost reached $29,000.
In the complaint filed in San Francisco federal court, Thomas Sandoval is seeking damages for the commissions he and other consumers paid to Coinbase for XRP tokens.
“Until late this month Coinbase sold the XRP token, the value of which was entirely linked to the success or failure of Ripple Co. and the managerial efforts of its executives,” he said in the complaint. “Indeed, Ripple Co.’s survival as a corporate entity depended on its sale of unlicensed XRP securities to the public to fund its business operations.”
Coinbase declined to comment on the complaint.
What Bloomberg Intelligence Says
Ripple is unlikely to beat the Securities and Exchange Commission’s lawsuit alleging the company violated federal securities laws by selling the digital asset XRP without registering it as a security, in our view. At stake in the Dec. 22 suit may be the ability to trade XRP and more than a billion dollars, though settlement for a fraction of that is also possible.
— Elliott Z. Stein, Senior Litigation Analyst, and Ben Elliott, Government Analyst
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The SEC said in July 2017 that companies raising money through the sale of digital assets must adhere to federal securities laws. A Ripple executive said this month the company will challenge the SEC’s suit, and that XRP is a currency not requiring registration as an investment contract.
The case is Sandoval v. Coinbase, 20-cv-09420, U.S. District Court, Northern District of California (San Francisco). The regulatory case is Securities and Exchange Commission v. Ripple Labs Inc., 20-cv-10832, U.S. District Court, Southern District of New York (Manhattan).