San Francisco-based cryptocurrency exchange faces a class action lawsuit arguing the company knew it had dealt in unlicensed securities by offering cryptocurrency XRP. Filed in federal court in San Francisco on Wednesday by Thomas Sandoval, the lawsuit alleges Coinbase knew XRP was a security.
“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 lawsuit states. “XRP is a security and not a commodity because Ripple Co. has sole control over the purported cryptocurrency’s ‘nodes,’ and is therefore a common enterprise for purposes of the federal securities laws.”
The lawsuit alleges: “Coinbase, as a result of its integration into Ripple Co.’s nodes, knew that Ripple Co. controlled all of the purported cryptocurrency’s nodes and XRP’s success or failure was entirely intertwined with that of Ripple Co.” Along with multiple other exchanges, Coinbase announced last week it would cease selling XRP.
Sandoval filed the complaint after the SEC filed a lawsuit in the same court against Ripple. That SEC complaint was filed against CEO Brad Garlinghouse, co-founder Chris Larsen and Ripple Labs, too. It states that from at least 2013 Garlinghouse and Larsen sold more than 14.6 billion units of the digital asset XRP in return for cash or other consideration worth over $1.38 billion to fund Ripple’s operations and enrich themselves.
Garlinghouse maintains XRP does not have to be registered as an investment contract.
“The SEC has permitted XRP to function as a currency for over eight years,” Garlinghouse said. Ripple will challenge the suit in courts “to get clear rules of the road for the entire industry in the U.S.”
Coinbase announced on Dec. 17 that it had confidentially submitted a draft registration statement For S-1 with SEC to go public. The announcement came with few details as the company did not reveal its IPO structure.