Coinbase Sued for Allowing the Sale of XRP

In an interesting consequence of Ripple Labs' battle with the U.S. Securities and Exchange Commission (SEC), a Missouri man claiming to be a Coinbase client is suing the crypto exchange for selling the XRP token.

In a complaint filed in the Northern District Court of California, Thomas C. Sandoval, the St. Louis County-based plaintiff, alleges Coinbase knowingly sold XRP as an unregistered security and gained commission on these sales.

The lawsuit, which seeks class action status, argues Coinbase violated California’s unfair competition laws by “[gaining] an unwarranted competitive advantage over digital asset exchanges that only sold commodities.”

“Coinbase sold a token called Ripple (hereafter referred to by its trading symbol: XRP), the value of which was entirely linked to the success or failure of Ripple Labs, Inc. (Ripple Co.) the company that created the token, and the managerial efforts of Ripple Co. executives. Investors in XRP, such as Plaintiff, reposed an expectation of profit in such managerial efforts by Ripple Co. executives and purchased the token in order to make money on their investment,” the complaint reads.

The SEC filed suit against Ripple Labs last week, claiming XRP is a security that Ripple has been selling for seven years without registering it or seeking an exemption, raising $1.3 billion in the process. As a result of the SEC action against Ripple, Coinbase said Monday it would suspend XRP trading on Jan. 19, 2021.

The lawsuit against Coinbase seeks unspecified compensatory damages, attorneys’ fees and other relief.

Anderson Kill partner Stephen Palley told CoinDesk he sees “a couple of issues” with this lawsuit. He said its allegations of fraud regarding unfair competition laws rest “on ‘information and belief,’ which is the legal equivalent of ‘I think so but am not really sure,’” Palley wrote in an email.

He added that Coinbase has “a pretty good record” of backing itself up in legal matters involving clients through the arbitration clause in its terms of service.

In the grand scheme of things, he concluded, Coinbase has more than client lawsuits to worry about with the SEC breathing down Ripple’s neck.

“This is going to be hard fought in motion practice and will likely end up in private arbitration unless the court finds that a fairly narrow public policy exception applies,” he said about the Coinbase lawsuit. “I’d assess the risk here to Coinbase (and other exchanges) as quite a bit less than that from continuing to list an asset the SEC has targeted and face much more dangerous enforcement action risk.”

Coinbase has not responded to CoinDesk’s request for comment.