US Crypto Exchanges May Face Possible Class Action Lawsuit

Crypto’s latest headache may be a large class action lawsuit filed on behalf of retail investors against top US crypto exchanges.

Longtime securities attorney Tom Grady, known as one of the nation’s leading investment fraud attorneys, is preparing for potential lawsuits against the nation’s largest crypto exchanges Coinbase, Robinhood, Kraken and others, according to a press release reviewed by FOX Business.

In the release, Grady said he launched an investigation into the exchange’s operations and their potential violations of state and federal securities laws by trading digital coins, the vast majority of which are considered by the SEC to be unregistered securities and thus operating in violation of federal coins. law. Grady says the exchanges may have misled investors by failing to provide them with inappropriate disclosures about the risks of trading and owning unregistered crypto.

“We believe Coinbase, Robinhood and other exchanges violated the law, and investors who lost money buying cryptocurrencies on their platforms may be entitled to recover those losses,” Grady said in the press release.

Frankfurt, Hesse, Germany – April 17, 2018: Many coins of different cryptocurrencies (iStock/Reuters)

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Coinbase, Robinhood did not immediately respond to a request for comment and Kraken declined to comment, but in the past these exchanges have maintained that they operate legally and do not facilitate the trading of coins that have been deemed unregistered securities by the Securities and Exchange Commission.

The press release says Grady, through his Tampa, Florida-based law firm, is also reaching out to customers of Coinbase, Robinhood and other exchanges who suffered losses buying cryptocurrencies on their platforms to share information about their investments.

The debate over how digital assets are classified has raged in the crypto industry since the SEC began taking enforcement action against various crypto companies for offering unregistered securities in 2017. The SEC believes the vast majority of digital coins are used for pure speculation or to conduct illegal activities. such as drug sales and money laundering, and they are separated from the underlying blockchain technology – a still-in-development method of transactions designed to provide a cheaper, safer and more efficient payment system for consumers.

Bitcoin gold cryptocurrency trading chart on smartphone close-up. (istock / iStock)

To determine whether a crypto is truly an unregistered security, the SEC imposes something known as the “Howey Test,” named after a 1946 Supreme Court case that determines whether investment contracts must be registered with the SEC. In 2020, the SEC brought charges against executives of Ripple, a cross-border digital payments company, for selling the token XRP to help build out the platform. Last month, the SEC sued crypto exchanges Gemini and Kraken for offering unregistered securities products to customers.

Like XRP, almost all digital coins are unregistered, opening the industry to a sweeping regulatory crackdown if the SEC prevails in its case against Ripple. For example, SEC Chairman Gary Gensler has said that he believes the majority of crypto tokens are classified as securities, with the possible exception of Bitcoin, which he believes can be classified as a commodity because there is no centralized entity that controls the asset and the asset is created through independent so-called miners.

Ripple, for its part, claims that the sale of XRP did not violate securities laws, and is fighting the SEC in federal court. A ruling is expected in the coming weeks.

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Any class-action lawsuit is sure to increase scrutiny of the $1 trillion crypto industry, which has seen a significant drop in value and has been rocked by scandal. The so-called crypto winter, caused by several high-profile crypto companies filing for bankruptcy, has seen the price of Bitcoin, the most valuable cryptocurrency, fall more than 50% from its all-time high. Wednesday’s announcement by troubled crypto bank Silvergate that it is liquidating assets and shutting down operations further pressures cryptocurrency prices.

FILE PHOTO: Representations of cryptocurrencies Bitcoin, Ethereum and DogeCoin are placed on the PC motherboard in this illustration taken June 29, 2021. REUTERS/Dado Ruvic/File Photo

In one of the biggest blows to the nascent industry, the US Attorney’s Office for the Southern District of New York recently indicted one-time crypto superstar Sam Bankman-Fried for allegedly running a Ponzi-like scheme through his crypto exchange FTX, before it recent implosion and bankruptcy.

Unlike FTX, which was a private company and operated in the Bahamas, both Coinbase, the American crypto exchange, and Robinhood, a discount brokerage house that also trades crypto, are both US-based companies and are listed on the stock market, and are therefore forced to meet SEC requirements for publication.

However, Grady claims that by facilitating transactions in digital coins that are essentially unregistered securities, the exchanges are actually key players in violating securities laws.

Grady has practiced securities law for four decades, making a name for himself representing retail investors who have been exploited by Wall Street firms. He currently chairs the Florida State Board of Education and previously served as Commissioner of the Florida Office of Financial Regulation.

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Crypto has not been the subject of many class action lawsuits because most retail investors believe that digital assets do not constitute securities, but rather currencies such as the dollar. However, Grady’s potential litigation could open the door to more lawsuits against crypto firms as the debate over classification continues to play out in Washington.

Grady, like Gensler, believes the vast majority of crypto tokens are unregistered securities, so by offering them as investments to customers, exchanges are violating both state and federal securities laws.

“This is yet another example of the excessive litigation created and encouraged by the lack of regulatory clarity in the United States regarding digital assets,” said attorney John Deaton, who is acting as amicus curiae in SEC vs. The Ripple Lawsuit. “When you have regulatory uncertainty combined with an anti-crypto campaign by regulators, it creates a hotbed of litigation. Whether it’s white-shoe defense firms representing companies under attack from the SEC’s regulatory enforcement policies, or bankruptcy attorneys, or, in this case, class action lawyers, we will continue to see litigation chaos in the United States, further driving innovation abroad.”