Class Action Claims Coinbase’s Sale of Ripple Tokens Is Illegal

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A proposed class action alleges cryptocurrency exchange Coinbase has illegally sold securities in exchange for commission payments without a license to do so.

The seven-page complaint claims that although Coinbase holds itself out as a digital asset exchange, the company’s sale of a token called Ripple (XRP) amounts to the sale of a security in that the value of Ripple is entirely linked to the success or failure of Ripple Labs and the efforts of its executives. Investors “repose[] an expectation of profit” in the managerial efforts of Ripple Labs’ execs, the lawsuit says, and bought the token with the goal of making money on their investments.  

The suit contends that Ripple is a security and not a commodity because Ripple Labs holds sole control over the purported cryptocurrency’s nodes, i.e. the computer that connects to a cryptocurrency network and holds the transaction ledger, and is therefore a common enterprise under the purview of federal securities law. The case notes that not all non-security cryptocurrencies use decentralized nodes, meaning there is no single point of failure or single entity that controls the protocol unit. 

“For example, there is no company that controls Bitcoin,” the suit states.

To the contrary, Coinbase, as a result of its integration into Ripple Labs’ nodes, knew that the company controlled all of the supposed cryptocurrency’s nodes, along with the fact that the success or failure of the Ripple token “was entirely intertwined with that of Ripple Co.,” the complaint asserts. 

“On information and belief, Coinbase knew at all relevant times that XRP did not meet the definition of a commodity—which Coinbase could legally sell to the public—but was in fact a security, which it could not legally sell to the public,” the suit says. 

The lawsuit’s December 30, 2020 filing comes just days after the Securities Exchange Commission (SEC) announced it had taken action against Ripple Labs, Inc. and its top executives over allegations that the parties had raised more than $1.3 billion through an “unregistered, ongoing digital asset securities offering.”

Six days after the SEC initiated action against Ripple Labs, Coinbase stopped offering the Ripple token for sale to the public, the lawsuit relays. 

The case looks to cover a class consisting of all persons who bought XRP on Coinbase and paid a commission to the company within the applicable statute of limitations period. 

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